CREATES

Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings

Research output: Working paper/Preprint Working paperResearch

Standard

Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. / Hillebrand, Eric; Mikkelsen, Jakob; Spreng, Lars; Urga, Giovanni.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2020.

Research output: Working paper/Preprint Working paperResearch

Harvard

Hillebrand, E, Mikkelsen, J, Spreng, L & Urga, G 2020 'Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Hillebrand, E., Mikkelsen, J., Spreng, L., & Urga, G. (2020). Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers No. 2020-19

CBE

Hillebrand E, Mikkelsen J, Spreng L, Urga G. 2020. Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Hillebrand, Eric et al. Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2020-19). 2020., 42 p.

Vancouver

Hillebrand E, Mikkelsen J, Spreng L, Urga G. Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. Aarhus: Institut for Økonomi, Aarhus Universitet. 2020.

Author

Hillebrand, Eric ; Mikkelsen, Jakob ; Spreng, Lars ; Urga, Giovanni. / Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings. Aarhus : Institut for Økonomi, Aarhus Universitet, 2020. (CREATES Research Papers; No. 2020-19).

Bibtex

@techreport{ef5e0a9eebdd457f8f03198db5b04150,
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 a large macro-dataset. Using 14 currencies over 1995–2018, we show that the loadings on the factors vary considerably over time with frequent sign changes. Allowing for time-varying loadings increases the percentage of explained variation in exchanges rates by an order of magnitude. Accounting for instabilities improves the predictive ability of the model globally and locally during crises, and yields better forecast of sign changes in exchange rates.",
keywords = "Foreign exchange rates, Macroeconomic factors, Time-varying loadings, High-dimensional factor models, Exchange rate forecasting",
author = "Eric Hillebrand and Jakob Mikkelsen and Lars Spreng and Giovanni Urga",
year = "2020",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2020-19",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings

AU - Hillebrand, Eric

AU - Mikkelsen, Jakob

AU - Spreng, Lars

AU - Urga, Giovanni

PY - 2020

Y1 - 2020

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 a large macro-dataset. Using 14 currencies over 1995–2018, we show that the loadings on the factors vary considerably over time with frequent sign changes. Allowing for time-varying loadings increases the percentage of explained variation in exchanges rates by an order of magnitude. Accounting for instabilities improves the predictive ability of the model globally and locally during crises, and yields better forecast 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 a large macro-dataset. Using 14 currencies over 1995–2018, we show that the loadings on the factors vary considerably over time with frequent sign changes. Allowing for time-varying loadings increases the percentage of explained variation in exchanges rates by an order of magnitude. Accounting for instabilities improves the predictive ability of the model globally and locally during crises, and yields better forecast of sign changes in exchange rates.

KW - Foreign exchange rates

KW - Macroeconomic factors

KW - Time-varying loadings

KW - High-dimensional factor models

KW - Exchange rate forecasting

M3 - Working paper

T3 - CREATES Research Papers

BT - Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -