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Can the Baltic Dry Index predict foreign exchange rates?

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  • Han, Liyan
  • Wan, Li
  • Xu, Yang

Abstract

The Baltic Dry Index (BDI) is commonly perceived as a leading indicator of economic activities. In this paper, we explore whether the BDI has predictive ability for exchange rates of fourteen major currencies against US dollar. Results of panel regression demonstrate that the BDI provides statistically significant long-run predictability of currency returns. An increase in the BDI is associated with a depreciation of currency. The three sub-indices of the BDI also show significant predictive power with similar patterns. The in-sample and out-of-sample results of individual time-series regressions illustrate that the BDI shows significant predictive ability in majority of the cases and displays an inverted U-shaped predictive pattern. Our results imply that by capturing information about economic fundamentals the BDI is a useful predictor for exchange rates.

Suggested Citation

  • Han, Liyan & Wan, Li & Xu, Yang, 2020. "Can the Baltic Dry Index predict foreign exchange rates?," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318307876
    DOI: 10.1016/j.frl.2019.04.014
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    2. Sheng, Xin & Kim, Won Joong & Gupta, Rangan & Ji, Qiang, 2023. "The impacts of oil price volatility on financial stress: Is the COVID-19 period different?," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 520-532.
    3. Chen, Yufeng & Xu, Jing & Miao, Jiafeng, 2023. "Dynamic volatility contagion across the Baltic dry index, iron ore price and crude oil price under the COVID-19: A copula-VAR-BEKK-GARCH-X approach," Resources Policy, Elsevier, vol. 81(C).
    4. Elie Bouri & Rangan Gupta & Luca Rossini, 2022. "The Role of the Monthly ENSO in Forecasting the Daily Baltic Dry Index," Working Papers 202229, University of Pretoria, Department of Economics.
    5. Zuzana Rowland & George Lazaroiu & Ivana Podhorská, 2020. "Use of Neural Networks to Accommodate Seasonal Fluctuations When Equalizing Time Series for the CZK/RMB Exchange Rate," Risks, MDPI, vol. 9(1), pages 1-21, December.
    6. Ni, Yinan & Barth, James R. & Sun, Yanfei, 2022. "On the dynamic capital structure of nations: Theory and empirics," Research in International Business and Finance, Elsevier, vol. 62(C).

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