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on International Finance |
| By: | Passari, Evgenia |
| Abstract: | I build an exchange rate strategy that trades currencies conditional on changes in the global prices of commodity indices; hence, termed “commodity strategy”. First, I document that commodity prices have signicant out-of-sample forecasting ability for the future exchange rates of several commodity exporters and importers at the daily frequency. However, I report that the reverse forecasting relationship does not survive out-of-sample testing. Second, I find a signicant cross-sectional spread, in both spot and excess returns, of 6% p.a. between the currencies that are predicted to appreciate and those that are predicted to depreciate. The returns appear to be uncorrelated to those of popular exchange rate strategies such as the carry trade and currency momentum. Furthermore, the spread in returns is not explained by traditional risk factors; however, it is partly accounted for by the strategy’s high transaction costs. Net probability can be restored by either implementing a simple market timing rule or by investing in developed markets with low costs and high liquidity. |
| Keywords: | Foreign Exchange; Commodity Currencies; Asset Pricing; |
| JEL: | F31 F37 G10 G11 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15216&r=ifn |
| By: | Tiozzo Pezzoli, Luca |
| Abstract: | This paper investigates the relevance of hidden factors in international bond risk premia to forecast future excess bond returns and macroeconomic variables such as economic growth and ination rate. Using maximum likelihood estimation of a linear Gaussian state-space model, adopted to explain the dynamics of expected excess bond returns of a given country, associated selection criteria detect as relevant, factors otherwise judged negligible by the classical explained variance approach adopted by Cochrane and Piazzesi (2005) and Cochrane and Piazzesi (2008). We call these factors hidden, meaning that they are not visible through the lens of a principal component analysis of expected excess bond returns. We find that these hidden factors are useful predictors of both future economic growth and ination rate given that they add forecasting power over and above the information contained both in the Cochrane and Piazzesi (2008) and in yield curve factors. These empirical findings are robust across different sample periods and countries as well as with respect to the interpolation technique used in the construction of the international bond yield data sets. |
| Keywords: | Financial econometrics; Interest rates; International finance; |
| JEL: | C52 E43 G12 G15 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15221&r=ifn |