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Are Global Factors Useful for Forecasting the Exchange Rate?

Author

Listed:
  • José Luiz Rossi Júnior
  • Pedro Fontoura
  • Marina Rossi

Abstract

This paper applies a common factors analysis framework to an exchange rate data panel, in order to better understand the forces behind exchange rate dynamics and provide a set of variables for exchange rate forecasting. Results demonstrate the model’s ability to extract key information to under-stand the driving forces of exchange rate movements using the exchange rate Brazilian Real to U.S. dollar; in addition, the model also shows statistically significant improvement in terms of forecasting performance in relation to the random walk benchmark as well as to traditional macroeconomic models found in economics literature.  JEL classification numbers: F31, F37, F47.

Suggested Citation

  • José Luiz Rossi Júnior & Pedro Fontoura & Marina Rossi, 2023. "Are Global Factors Useful for Forecasting the Exchange Rate?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(6), pages 1-14.
    • Handle: RePEc:spt:apfiba:v:13:y:2023:i:6:f:13_6_14
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    More about this item

    Keywords

    Exchange rate; Common factors; Forecasting.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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