Can Oil Prices Forecast Exchange Rates?

54 Pages Posted: 12 May 2011

See all articles by Domenico Ferraro

Domenico Ferraro

affiliation not provided to SSRN

Barbara Rossi

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 29, 2011

Abstract

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.

JEL Classification: F31, F37, C22, C53

Suggested Citation

Ferraro, Domenico and Rossi, Barbara and Rogoff, Kenneth S., Can Oil Prices Forecast Exchange Rates? (March 29, 2011). Economic Research Initiatives at Duke Working Paper No. 95. Available at SSRN: https://ssrn.com/abstract=1798733

Domenico Ferraro

affiliation not provided to SSRN

Barbara Rossi (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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