Forecasting Commodity Currencies: The Role of Fundamentals with Short-Lived Predictive Content

50 Pages Posted: 7 Nov 2015 Last revised: 15 Feb 2016

See all articles by Claudia Foroni

Claudia Foroni

Norges Bank

Francesco Ravazzolo

Free University of Bolzano

Pinho Ribeiro

University of Glasgow - Adam Smith Business School

Date Written: October 30, 2015

Abstract

Research demonstrates that commodity price changes exhibit a short-lived, yet robust contemporaneous effect on commodity currencies, which is mainly detectable in daily (high)-frequency data. We show that using MIxed DAta Sampling (MIDAS) models in a Bayesian setting to suitably exploit such short-lived effects, leads to out-of-sample exchange rate forecast improvements at monthly horizon both on point and density forecasting. Further, the usual low-frequency predictors, such as money supplies and interest rates differentials, typically receive little support from the data at this horizon, whereas daily commodity prices are highly likely. We also introduce the random walk Metropolis-Hastings technique as a new tool to estimate MIDAS regressions.

Keywords: Exchange rate point and density forecasting, Commodity prices, MIDAS model, Bayesian model averaging, Metropolis-Hastings algorithm

JEL Classification: C53, C55, F37

Suggested Citation

Foroni, Claudia and Ravazzolo, Francesco and Ribeiro, Pinho, Forecasting Commodity Currencies: The Role of Fundamentals with Short-Lived Predictive Content (October 30, 2015). Norges Bank Working Paper 14/2015. Available at SSRN: https://ssrn.com/abstract=2687064

Claudia Foroni

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Francesco Ravazzolo

Free University of Bolzano ( email )

Bolzano
Italy

Pinho Ribeiro (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

HOME PAGE: http://www.sites.google.com/site/pinhojribeiro/research

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