Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time-varying factor loadings

Eric Hillebrand; Jakob Guldbæk Mikkelsen; Lars Spreng; Giovanni Urga

doi:10.1002/jae.2984

Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time-varying factor loadings

Eric Hillebrand^*, Jakob Guldbæk Mikkelsen, Lars Spreng, Giovanni Urga

^*Corresponding author af dette arbejde

Institut for Økonomi

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

1 Citationer (Scopus)

9 Downloads (Pure)

Abstract

We examine the relationship between exchange rates and macroeconomic fundamentals using a two-step maximum likelihood estimator through which we compute time-varying factor loadings. Factors are obtained as principal components, extracted from vintage macro-datasets that combine FRED-MD and OECD databases. Using 14 currencies over 1990–2021, we show that the loadings on the factors vary considerably over time and increase the percentage of explained variation in exchange rates by an order of magnitude. Time-varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.

Originalsprog	Engelsk
Tidsskrift	Journal of Applied Econometrics
Vol/bind	38
Nummer	6
Sider (fra-til)	857-877
Antal sider	21
ISSN	0883-7252
DOI	https://doi.org/10.1002/jae.2984
Status	Udgivet - sep. 2023

Adgang til dokumentet

10.1002/jae.2984Licens: CC BY-NC

J of Applied Econometrics - 2023 - Hillebrand - Exchange rates and macroeconomic fundamentals Evidence of instabilitiesForlagets udgivne version, 2,91 MBLicens: CC BY-NC

Andre filer og links

Link to publication in Scopus

Citationsformater

@article{f0edfce0490d42f59450639d713ccbf0,

title = "Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time-varying factor loadings",

abstract = "We examine the relationship between exchange rates and macroeconomic fundamentals using a two-step maximum likelihood estimator through which we compute time-varying factor loadings. Factors are obtained as principal components, extracted from vintage macro-datasets that combine FRED-MD and OECD databases. Using 14 currencies over 1990–2021, we show that the loadings on the factors vary considerably over time and increase the percentage of explained variation in exchange rates by an order of magnitude. Time-varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.",

keywords = "exchange rate forecasting, foreign exchange rates, high-dimensional factor models, macroeconomic factors, time-varying loadings",

author = "Eric Hillebrand and Mikkelsen, {Jakob Guldb{\ae}k} and Lars Spreng and Giovanni Urga",

year = "2023",

month = sep,

doi = "10.1002/jae.2984",

language = "English",

volume = "38",

pages = "857--877",

journal = "Journal of Applied Econometrics",

issn = "0883-7252",

publisher = "John Wiley and Sons Ltd",

number = "6",

}

Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time-varying factor loadings. / Hillebrand, Eric; Mikkelsen, Jakob Guldbæk; Spreng, Lars et al.
I: Journal of Applied Econometrics, Bind 38, Nr. 6, 09.2023, s. 857-877.

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

TY - JOUR

T1 - Exchange rates and macroeconomic fundamentals

T2 - Evidence of instabilities from time-varying factor loadings

AU - Hillebrand, Eric

AU - Mikkelsen, Jakob Guldbæk

AU - Spreng, Lars

AU - Urga, Giovanni

PY - 2023/9

Y1 - 2023/9

N2 - We examine the relationship between exchange rates and macroeconomic fundamentals using a two-step maximum likelihood estimator through which we compute time-varying factor loadings. Factors are obtained as principal components, extracted from vintage macro-datasets that combine FRED-MD and OECD databases. Using 14 currencies over 1990–2021, we show that the loadings on the factors vary considerably over time and increase the percentage of explained variation in exchange rates by an order of magnitude. Time-varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.

AB - We examine the relationship between exchange rates and macroeconomic fundamentals using a two-step maximum likelihood estimator through which we compute time-varying factor loadings. Factors are obtained as principal components, extracted from vintage macro-datasets that combine FRED-MD and OECD databases. Using 14 currencies over 1990–2021, we show that the loadings on the factors vary considerably over time and increase the percentage of explained variation in exchange rates by an order of magnitude. Time-varying loadings improve the overall predictive ability of the model, especially during crises, and lead to better forecasts of sign changes in exchange rates.

KW - exchange rate forecasting

KW - foreign exchange rates

KW - high-dimensional factor models

KW - macroeconomic factors

KW - time-varying loadings

UR - http://www.scopus.com/inward/record.url?scp=85159117977&partnerID=8YFLogxK

U2 - 10.1002/jae.2984

DO - 10.1002/jae.2984

M3 - Journal article

AN - SCOPUS:85159117977

SN - 0883-7252

VL - 38

SP - 857

EP - 877

JO - Journal of Applied Econometrics

JF - Journal of Applied Econometrics

IS - 6

ER -

Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time-varying factor loadings

Abstract

Adgang til dokumentet

Andre filer og links

Fingeraftryk

Citationsformater