The Predictive Relationship Between Exchange Rate Expectations and Base Metal Prices

22 Pages Posted: 31 Oct 2018

See all articles by Pablo M. Pincheira

Pablo M. Pincheira

Adolfo Ibanez University - School of Business

Nicolas Hardy

Universidad Finis Terrae

Date Written: August 9, 2018

Abstract

In this paper we show that survey-based-expectations about the future evolution of the Chilean exchange rate have the ability to predict the returns of the six primary non-ferrous metals: aluminum, copper, lead, nickel, tin and zinc. Predictability is also found for returns of the London Metal Exchange Index. Previous studies have shown that the Chilean exchange rate has the ability to predict copper returns, a world commodity index and base metal prices. Nevertheless, our results indicate that expectations about the Chilean peso have stronger predictive ability relative to the Chilean currency. This is shown both in-sample and out-of-sample. By focusing on expectations of a commodity currency, and not on the currency itself, our paper provides indirect but new and strong evidence of the ability that commodity currencies have to forecast commodity prices. Our results are also consistent with the present-value-model for exchange rate determination.

Keywords: forecasting, commodities, time-series, exchange rates, out-of-sample comparison

JEL Classification: C52, C53, G17, E270, E370, F370, L740, O180, R310

Suggested Citation

Pincheira, Pablo M. and Hardy, Nicolas, The Predictive Relationship Between Exchange Rate Expectations and Base Metal Prices (August 9, 2018). Available at SSRN: https://ssrn.com/abstract=3263709 or http://dx.doi.org/10.2139/ssrn.3263709

Pablo M. Pincheira (Contact Author)

Adolfo Ibanez University - School of Business ( email )

Diagonal Las Torres 2640
Peñalolén
Santiago
Chile

Nicolas Hardy

Universidad Finis Terrae ( email )

Av. Pedro de Valdivia 1509
Ñuñoa
Santiago, Santiago
Chile

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
83
Abstract Views
535
rank
370,144
PlumX Metrics