Oil Strikes Back: Trend Factors and Exchange Rates

47 Pages Posted: 16 Dec 2018

See all articles by Liyan Han

Liyan Han

Beihang University (BUAA) - School of Economic and Management Science

Yang Xu

Beijing University of Technology

Qunzi Zhang

Shandong University

Xiaoneng Zhu

Shanghai University of Finance and Economics

Date Written: October 1, 2018

Abstract

A well-known puzzle in international finance is that fluctuations in exchange rate are very difficult to predict and existing predictive models often perform worse than the naive random walk model. In this paper, we construct an oil trend factor and find that it performs better than the naive random walk in predicting exchange rates out-of-sample and delivers superior economic significance. This result holds in both developed and developing countries, with different forecasting horizons and with different specifications of trend factors. Notably, we also show that the predictive power of the oil trend factor is closely related to macroeconomic fundamentals.

Keywords: Exchange Rates, Forecasting, Out-of-Sample, Oil, Asset Allocation

JEL Classification: F31, F37, G11, G15, Q43

Suggested Citation

Han, Liyan and Xu, Yang and Zhang, Qunzi and Zhu, Xiaoneng, Oil Strikes Back: Trend Factors and Exchange Rates (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3289941 or http://dx.doi.org/10.2139/ssrn.3289941

Liyan Han

Beihang University (BUAA) - School of Economic and Management Science ( email )

37 Xue Yuan Road
Beijing 100083
China

Yang Xu

Beijing University of Technology ( email )

100 Ping Le Yuan
Chaoyang District
Beijing, Beijing 100020
China

Qunzi Zhang (Contact Author)

Shandong University ( email )

27 Shanda Nanlu
South Rd.
Jinan, Shandong 250100
China

HOME PAGE: http://www.econ.sdu.edu.cn/info/1257/42629.htm

Xiaoneng Zhu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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

Paper statistics

Downloads
131
Abstract Views
1,417
rank
272,280
PlumX Metrics