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Oil Strikes Back: Trend Factors and Exchange Rates

Author

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  • LIYAN HAN
  • YANG XU
  • QUNZI ZHANG
  • XIAONENG ZHU

Abstract

A well‐known puzzle in international finance is that, to predict exchange rate returns, existing predictive models often perform worse than the naive random walk (RW) model. In this paper, we construct an oil trend factor which performs better than the RW model. More importantly, an oil‐trend‐based dynamic trading strategy can generate superior economic values. This result holds in both developed and emerging markets, with different forecasting horizons, with different specifications of trend factors, and across different currencies. Finally, we explore the economic link for the powerful predictability of the oil trend factor.

Suggested Citation

  • Liyan Han & Yang Xu & Qunzi Zhang & Xiaoneng Zhu, 2026. "Oil Strikes Back: Trend Factors and Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 58(1), pages 141-181, February.
    • Handle: RePEc:wly:jmoncb:v:58:y:2026:i:1:p:141-181
    DOI: 10.1111/jmcb.13146
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