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Can Exchange Rates Really Forecast Commodity Prices?

Author

Listed:
  • Lasse Bork

    (Aalborg University)

  • Pablo Rovira Kaltwasser

    (University of Leuven)

  • Piet Sercu

    (University of Leuven)

  • Tom Vinaimont

    (Nazarbayev University, Graduate School of Business)

Abstract

Chen, Rogoff and Rossi (2010) report that, for 'commodity currencies', the exchange rate can predict the country's commodity index but not vice versa, consistent with the Engel-West model where the country's key export prices act as the fundamentals. However, their conclusion is not robust to the test statistic. Out-of-sample, at the 10 percent level, they find ample evidence of predictability 'against a variety of benchmarks' (the random walk, the random walk with drift, and an AR(1) process). As commodity prices in their sample are AR(1), only the latter benchmark is valid, and against that one we find nearly no evidence of predictability. Our findings remain when we use a larger sample suggesting that both commodity and currency prices react immediately to current events and anticipate the future to the extent possible. If both are equally forward-looking, neither should be predictable.

Suggested Citation

  • Lasse Bork & Pablo Rovira Kaltwasser & Piet Sercu & Tom Vinaimont, 2023. "Can Exchange Rates Really Forecast Commodity Prices?," Working Papers 2023/04, Nazarbayev University, Graduate School of Business.
    • Handle: RePEc:asx:nugsbw:2023-04
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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