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A Bayesian Nonparametric Investigation of the Predictive Effect of Exchange Rates on Commodity Prices

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  • Xin Jin

    (School of Economics, Shanghai University of Finance and Economics (SUFE), Shanghai 200433, China; Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, Shanghai 200433, China)

Abstract

This study proposes a full Bayesian nonparametric procedure to investigate the predictive power of exchange rates in relation to commodity prices for three commodity-exporting countries: Canada, Australia, and New Zealand. We propose a new time-dependent infinite mixture of a normal linear regression model of the conditional distribution of the commodity price index. The mixing weights follow a set of Probit stick-breaking priors that are time-varying. We find that exchange rates have a positive predictive effect in general, but accounting for time variation does not improve forecasting performance. By contrast, the intercept in the regression and the lagged dependent variable show signs of parameter change over time in most cases, which is important in forecasting both the mean and the density of commodity prices one period ahead. The results also suggest that the variance is a large source of the time variation in the conditional distribution of commodity prices.

Suggested Citation

  • Xin Jin, 2020. "A Bayesian Nonparametric Investigation of the Predictive Effect of Exchange Rates on Commodity Prices," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 15(2), pages 179-210, June.
  • Handle: RePEc:fec:journl:v:15:y:2020:i:2:p:179-210
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-011-020-0009-5
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    More about this item

    Keywords

    Bayesian nonparametrics; Dirichlet process mixture; stick-breaking process; Markov China Monte Carlo (MCMC); predictive likelihood; foreign exchange rate; commodity price;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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