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Can Oil Prices Forecast Exchange Rates?

  • Domenico Ferraro
  • Ken Rogoff
  • Barbara Rossi

This paper investigates whether oil price shocks have a reliable and stable out-of-sample relationship with the Canadian/U.S Dollar nominal exchange rate. Despite state-of-the-art methodologies and clean data, we find paradoxically little systematic relation between oil prices and the exchange rate, especially if one takes the monthly and quarterly frequencies into account. In contrast, the very short term relationship between oil prices and exchange rates at the daily frequency is rather robust, and holds no matter whether we use contemporaneous (realized) or lagged oil price shocks in our regression. However, the short-term out-of-sample predictive ability is ephemeral, and it mostly appears after time variation in the forecasting ability of the models has been appropriately taken into account. We show that a similar results hold for other currencies and commodity price shocks.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 11-05.

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Length: 54
Date of creation: 2011
Date of revision:
Handle: RePEc:duk:dukeec:11-05
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Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097

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Web page: http://econ.duke.edu/

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