When the Walk is Not Random: Commodity Prices and Exchange Rates

54 Pages Posted: 8 Apr 2016

See all articles by Emanuel Kohlscheen

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Fernando H. Avalos

Bank for International Settlements (BIS)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 2016

Abstract

We show that there is a distinct commodity-related driver of exchange rate movements, even at fairly high frequencies. Commodity prices predict exchange rate movements of 11 commodity-exporting countries in an in-sample panel setting for horizons up to two months. We also find evidence of systematic (pseudo) out-of-sample predictability, overturning the results of Meese and Rogoff (1983): information embedded in our country-specific commodity price indices clearly helps improving upon the predictive accuracy of the random walk in the majority of countries. We further show that the link between commodity prices and exchange rates is not driven by changes in global risk appetite or carry.

Keywords: commodities, exchange rates, interest rates

JEL Classification: F10, F31, G12

Suggested Citation

Kohlscheen, Emanuel and Avalos, Fernando Hugo and Schrimpf, Andreas, When the Walk is Not Random: Commodity Prices and Exchange Rates (March 2016). BIS Working Paper No. 551. Available at SSRN: https://ssrn.com/abstract=2752433

Emanuel Kohlscheen (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fernando Hugo Avalos

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland
+41 61 280 8650 (Phone)
+41 61 280 9100 (Fax)

HOME PAGE: http://www.bis.org/author/fernando_avalos.htm

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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