On Forward-Looking Exchange Rates and Commodity Prices

Abstract

This paper ties together recent literature on the forecastability of commodity prices and exchange rates using insights from the study of leveraged financial institutions. I exhibit evidence that the Chen, Rogoff and Rossi (2008) quarterly predictability of commodity returns by changes in exchange rates may be driven by fluctuations in financial intermediary risk appetite, which forecast both commodity returns and exchange rates.

Keywords: asset pricing, financial intermediaries, exchange rates, commodity prices, forecasting, risk appetite

JEL Classification: C52, C53, F31, F47, G12, G13, G24