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Can oil prices forecast exchange rates?

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  • Domenico Ferraro
  • Ken Rogoff
  • Barbara Rossi

Abstract

This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S. dollar nominal exchange rate. Despite state-of-the-art methodologies, the authors find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether the authors use contemporaneous (realized) or lagged oil prices in their regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-34.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-34

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Keywords: Foreign exchange rates ; Economic forecasting;

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Citations

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Cited by:
  1. Beckmann, Joscha & Czudaj, Robert, 2013. "Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 665-678.
  2. Sévi, Benoît & Le Pen, Yannick, 2013. "Futures trading and the excess comovement of commodity prices," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/11382, Paris Dauphine University.
  3. Bakshi, Gurdip & Panayotov, George, 2013. "Predictability of currency carry trades and asset pricing implications," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 139-163.
  4. Francesco Ravazzolo & Marco J. Lombardi, 2012. "Oil price density forecasts: Exploring the linkages with stock markets," Working Papers, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School 0008, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  5. Dunis, Christian & Kellard, Neil M. & Snaith, Stuart, 2013. "Forecasting EUR–USD implied volatility: The case of intraday data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 4943-4957.
  6. Hui Jun ZHANG & Jean-Marie DUFOUR & John W. GALBRAITH, 2013. "Exchange Rates and Commodity Prices : Measuring Causality at Multiple Horizons," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 14-2013, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Marco Jacopo Lombardi, 2013. "On the correlation between commodity and equity returns: implications for portfolio allocation," BIS Working Papers, Bank for International Settlements 420, Bank for International Settlements.
  9. Yu-chin Chen & Kenneth Rogoff, 2006. "Are the Commodity Currencies an Exception to the Rule?," Working Papers, University of Washington, Department of Economics UWEC-2006-28, University of Washington, Department of Economics, revised Mar 2012.
  10. Zied Ftiti & Aviral Tiwari & Ibrahim Fatnassi, 2014. "Oil price and macroeconomy in India - An evolutionary cospectral coherence approach," Working Papers, Department of Research, Ipag Business School 2014-068, Department of Research, Ipag Business School.
  11. Selmi, Refk & Bouoiyour, Jamal & Ayachi, Fethi, 2012. "Another Look at the Interaction Between Oil Price Uncertainty and Exchange Rate Volatility: The Case of Small Open Economies," MPRA Paper 49144, University Library of Munich, Germany, revised Oct 2012.
  12. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  13. Jose Luiz Rossi Jr & Wilson Felíci, 2014. "Common Factors And The Exchange Rate: Results From The Brazilian Case," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gra 125, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  14. repec:ipg:wpaper:19 is not listed on IDEAS
  15. Yi Zhang, 2013. "The Links between the Price of Oil and the Value of US Dollar," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 3(4), pages 341 - 351.

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