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Predicting exchange rate with commodity prices: The role of structural breaks and asymmetries

Author

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  • Afees A. Salisu

    (Centre for Econometric and Allied Research, University of Ibadan)

  • Wasiu Adekunle

    (Centre for Econometric and Allied Research, University of Ibadan)

  • Zachariah Emmanuel

    (Centre for Econometric and Allied Research, University of Ibadan Department of Economics, Federal University Wukari, Taraba State, Nigeria)

  • Wasiu A. Alimi

    (Centre for Econometric and Allied Research, University of Ibadan)

Abstract

In this paper, we offer new evidence on the predictability of exchange rate with commodity prices by accounting for the role of asymmetries and structural breaks. In particular, we evaluate whether such considerations matter for the forecast performance of the predictive model for exchange rate. We further account for any possible bias in estimation due to the presence of persistence, endogeneity and conditional heteroscedasticity effects in our predictors. Monthly data of five major tradable currency pairs in the world and disaggregated commodity price indices over the period of 1960 to 2017 are utilized. We find significant improvements in both the in-sample and out-of-sample forecast performance of the predictive model for exchange rate when asymmetries and structural breaks are accommodated. In addition, all the economic models considered with and without asymmetries and structural breaks offer superior forecast performance over the ARFIMA model. Our results are robust to alternative exchange rates and commodity price indices and different breaks, data samples and forecast horizons.

Suggested Citation

  • Afees A. Salisu & Wasiu Adekunle & Zachariah Emmanuel & Wasiu A. Alimi, 2018. "Predicting exchange rate with commodity prices: The role of structural breaks and asymmetries," Working Papers 055, Centre for Econometric and Allied Research, University of Ibadan.
    • Handle: RePEc:cui:wpaper:0055
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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