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What Drives Exchange Rates? Reassessing Currency Return Predictability
Ferreira Filipe, Sara; Maio, Paulo


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Keywords :
Exchange rates; Currency return predictability
Abstract :
[en] We compute a variance decomposition for the log exchange rate based on a present-value relation. At long horizons, return predictability drives the variation in the exchange rate while predictability of future interest rate differentials plays a secondary role. At shorter horizons, the dominant source is predictability of the future spot rate. There is more return predictability and less interest spread and exchange rate predictability in the case of real exchange rates compared to nominal exchange rates. An alternative decomposition based on a first-order VAR tends to overstate the importance of predictability of future interest spreads and exchange rates.
Disciplines :
Author, co-author :
Ferreira Filipe, Sara ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF)
Maio, Paulo;  Hanken School of Economics
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Title :
What Drives Exchange Rates? Reassessing Currency Return Predictability
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since 21 November 2015


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