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Activity Number:
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344
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Type:
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Invited
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Date/Time:
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Tuesday, August 4, 2009 : 2:00 PM to 3:50 PM
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Sponsor:
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Business and Economic Statistics Section
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| Abstract - #303105 |
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Title:
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Factor Model Forecasts of Exchange Rates
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Author(s):
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Kenneth West*+
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Companies:
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University of Wisconsin-Madison
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Address:
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1180 Observatory Drive, Madison, WI, 53706,
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Keywords:
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forecasting ; exchange rates ; factor ; random walk ; prediction
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Abstract:
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We construct factors from a cross section of exchange rates and use the idiosyncratic deviations from the factors to forecast. In a stylized data generating process, we show that such forecasts can be effective even if there is essentially no serial correlation in the univariate exchange rate processes. We apply the technique to a panel of bilateral U.S. dollar rates against 17 OECD countries. We forecast using factors, and using factors combined with any of fundamentals suggested by Taylor rule, monetary and purchasing power parity (PPP) models.
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