Can Exchange Rates Forecast Commodity Prices? A Reconsideration

52 Pages Posted: 30 Jul 2014 Last revised: 6 Feb 2018

Lasse Bork

Aalborg University - Department of Business and Management

Pablo Rovira Kaltwasser

Catholic University of Leuven (KUL)

Piet Sercu

FEB at KU Leuven

Date Written: February 03, 2018

Abstract

Engel and West (2005) model log exchange rates as discounted log fundamentals. For ‘commodity currencies’, commodity prices are often viewed as key fundamentals, implying that commodity prices should, therefore, be predicted by exchange rates and not vice-versa - which would run counter to a vast literature that regards commodities as financial assets, whose price changes are normally hard to predict.

Prior empirical results have not lead to a consensus. Using more and cleaner data, various frequencies, different indices like principal components and Efficient Y-Index regression (EYRe), and a wider array of tests (including model averaging and trading tests), we find no asymmetric predictive ability either way; the link is essentially contemporaneous.

Keywords: Commodity Prices, Exchange Rates, Granger Causality, Forecast, Forecast Combination

JEL Classification: C22, C52, C53, F31, F47

Suggested Citation

Bork, Lasse and Rovira Kaltwasser, Pablo and Sercu, Piet, Can Exchange Rates Forecast Commodity Prices? A Reconsideration (February 03, 2018). Available at SSRN: https://ssrn.com/abstract=2473624 or http://dx.doi.org/10.2139/ssrn.2473624

Lasse Bork

Aalborg University - Department of Business and Management ( email )

Aalborg, DK-9220
Denmark
+45 9940 2707 (Phone)

HOME PAGE: http://personprofil.aau.dk/profil/123645?lang=en

Pablo Rovira Kaltwasser (Contact Author)

Catholic University of Leuven (KUL) ( email )

Naamsestraat 69
Leuven, 3000
Belgium

HOME PAGE: http://www.econ.kuleuven.ac.be/ew/academic/intecon/Rovira/default.htm

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

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