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Forecasting Exchange Rates with Commodity Convenience Yields

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Abstract

This paper investigates whether commodity convenience yields - the yields that accrue to the holders of physical commodities - can predict the exchange rate of commodity-exporters' currencies. Predictability is a consequence of the fact that i) convenience yields are useful predictors for commodity prices and ii) commodity currencies have a strong relationship with commodity prices. The empirical evidence indicates that there is a significant relationship between aggregate measures of convenience yields and commodity currencies' exchange rate, both in-sample and out-of- sample. A high level of convenience yields strongly predicts a depreciation of the Australian, Canadian and New Zealand dollars exchange rates at horizons of 1 to 24 months.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 12.03.

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Length: 40 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:szg:worpap:1203

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References

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  1. Yu-Chin Chen & Kenneth S. Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1145-1194, August.
  2. Bacchetta, Philippe & Beutler, Toni & van Wincoop, Eric, 2009. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," CEPR Discussion Papers 7383, C.E.P.R. Discussion Papers.
  3. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  4. Nikolay Gospodinov & Serena Ng, 2013. "Commodity Prices, Convenience Yields, and Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 206-219, March.
  5. Amano, Robert A. & van Norden, Simon, 1995. "Terms of trade and real exchange rates: the Canadian evidence," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 83-104, February.
  6. Ron Alquist & Lutz Kilian & Robert J. Vigfusson, 2011. "Forecasting the Price of Oil," Working Papers 11-15, Bank of Canada.
  7. Hjalmarsson, Erik, 2011. "New Methods for Inference in Long-Horizon Regressions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 815-839, June.
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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, vol. 40(C), pages 665-678.

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