On the Driving Forces of Real Exchange Rates: Is the Japanese Yen Different?

70 Pages Posted: 16 Sep 2014 Last revised: 12 Sep 2023

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Ming Zeng

University of Gothenburg - Centre for Finance

Date Written: September 1, 2023

Abstract

We estimate variance decompositions of the real exchange rate (q) for 19 currencies based
on a present-value relation. At very short horizons, the driving force of q is predictability of
the future exchange rate. At long horizons, return predictability drives most variation in q,
with predictability of interest differentials playing a secondary role. This pattern is especially
strong for the Non-G10 currencies. However, the long-run predictability mix associated with
the Japanese Yen clearly deviates from the other currencies and is unstable over time. The
quantitative simulation of a liquidity-based exchange rate model largely replicates our main
empirical findings.

Keywords: currency return and interest spread predictability, Japanese Yen, variance decompositions, present-value relation, liquidity premium, calibration and simulation

JEL Classification: F31, G12, G15

Suggested Citation

Maio, Paulo F. and Zeng, Ming, On the Driving Forces of Real Exchange Rates: Is the Japanese Yen Different? (September 1, 2023). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2496439 or http://dx.doi.org/10.2139/ssrn.2496439

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Ming Zeng

University of Gothenburg - Centre for Finance ( email )

Vasagatan 1
Göteborg, 40530
Sweden

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
326
Abstract Views
2,313
Rank
169,453
PlumX Metrics