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Perry Sadorsky - One of the best experts on this subject based on the ideXlab platform.
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oil prices Exchange Rates and emerging stock markets
Energy Economics, 2012Co-Authors: Syed Abul Basher, Alfred A Haug, Perry SadorskyAbstract:While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) the relationship between oil prices and Exchange Rates, relatively little is known about the dynamic relationship between oil prices, Exchange Rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard and the recently developed projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar Exchange Rates in the short run. The model also captures stylized facts regarding movements in oil prices. A positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices. There is also evidence that increases in emerging market stock prices increase oil prices.
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oil prices Exchange Rates and emerging stock markets
MPRA Paper, 2011Co-Authors: Syed Abul Basher, Alfred A Haug, Perry SadorskyAbstract:While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) the relationship between oil prices and Exchange Rates, relatively little is known about the dynamic relationship between oil prices, Exchange Rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard and projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar Exchange Rates in the short run. The model also captures stylized facts regarding movements in oil prices. A positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices. There is also evidence that increases in emerging market stock prices increases oil prices.
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oil prices Exchange Rates and emerging stock markets
MPRA Paper, 2010Co-Authors: Syed Abul Basher, Alfred A Haug, Perry SadorskyAbstract:While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) oil prices and Exchange Rates, relatively little is known about the relationship between oil prices, Exchange Rates and emerging stock markets. This paper proposes and estimates a structural vector autoregression to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard, projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar Exchange Rates in the short run.
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the empirical relationship between energy futures prices and Exchange Rates
Energy Economics, 2000Co-Authors: Perry SadorskyAbstract:Abstract This paper investigates the interaction between energy futures prices and Exchange Rates. Results are presented to show that futures prices for crude oil, heating oil and unleaded gasoline are co-integrated with a trade-weighted index of Exchange Rates. This is important because it means that there exists a long-run equilibrium relationship between these four variables. Granger causality results for both the long- and short-run are presented. Evidence is also presented that suggests Exchange Rates transmit exogenous shocks to energy futures prices.
Barbara Rossi - One of the best experts on this subject based on the ideXlab platform.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2010Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:We show that “commodity currency” Exchange Rates have surprisingly robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policy makers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting Exchange Rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that Exchange Rates are strongly forward-looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.
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can Exchange Rates forecast commodity prices
National Bureau of Economic Research, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that “commodity currency” Exchange Rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. J.E.L. Codes: C52, C53, F31, F47. Key words: Exchange Rates, forecasting, commodity prices, random walk. Acknowledgements. We would like to thank C. Burnside, C. Engel, M. McCracken, R. Startz, V. Stavreklava, A. Tarozzi, M. Yogo and seminar participants at the University of Washington for comments. We are also grateful to various staff members of the Reserve Bank of Australia, the Bank of Canada, the Reserve Bank of New Zealand, and the IMF for helpful discussions and for providing some of the data used in this paper.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that "commodity currency" Exchange Rates have remarkably robust power in predicting future global commodity prices, both in sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.
Yuchin Chen - One of the best experts on this subject based on the ideXlab platform.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2010Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:We show that “commodity currency” Exchange Rates have surprisingly robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policy makers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting Exchange Rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that Exchange Rates are strongly forward-looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.
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can Exchange Rates forecast commodity prices
National Bureau of Economic Research, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that “commodity currency” Exchange Rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. J.E.L. Codes: C52, C53, F31, F47. Key words: Exchange Rates, forecasting, commodity prices, random walk. Acknowledgements. We would like to thank C. Burnside, C. Engel, M. McCracken, R. Startz, V. Stavreklava, A. Tarozzi, M. Yogo and seminar participants at the University of Washington for comments. We are also grateful to various staff members of the Reserve Bank of Australia, the Bank of Canada, the Reserve Bank of New Zealand, and the IMF for helpful discussions and for providing some of the data used in this paper.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that "commodity currency" Exchange Rates have remarkably robust power in predicting future global commodity prices, both in sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.
Xavier Gabaix - One of the best experts on this subject based on the ideXlab platform.
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rare disasters and Exchange Rates
Quarterly Journal of Economics, 2016Co-Authors: Emmanuel Farhi, Xavier GabaixAbstract:We propose a new model of Exchange Rates, which yields a theory of the forward premium puzzle. Our explanation combines two ingredients: the possibility of rare economic disasters, and an asset view of the Exchange rate. Our model is frictionless, has complete markets, and works for an arbitrary number of countries. In the model, rare worldwide disasters can occur and affect each country’s productivity. Each country’s exposure to disaster risk varies over time according to a mean-reverting process. Ri sky countries command high risk premia: they feature a depreciated Exchange rate and a high interest rate. As their risk premium mean reverts, their Exchange rate appreciates. Therefore, currencies of high interest rate countries appreciate on average. To make the notion of disaster risk more implementable, we show how options prices might in principle uncover latent disaster risk, and help forecast Exchange rate movements. We then extend the framework to incorporate two factors: a disaster risk factor, and a business cycle factor. We calibrate the model and obtain quantitatively realistic values for the volatility of the Exchange rate, the forward premium puzzle regression coefficients, and near-random walk Exchange rate dynamics. Finally, we solve a model of stock markets across countries, which yields a series of predictions about the joint behavior of Exchange Rates, bonds, options and stocks across countries. The evidence from the options market appears to be supportive of the model. (JEL: E43, E44, F31, G12, G15)
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rare disasters and Exchange Rates
2008Co-Authors: Emmanuel Farhi, Xavier GabaixAbstract:We propose a new model of Exchange Rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of world disasters as well as each country's exposure to these events is time-varying. This creates joint fluctuations in Exchange Rates, interest Rates, options, and stock markets. The model accounts for a series of major puzzles in Exchange Rates: excess volatility and Exchange rate disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and Exchange Rates. It also makes empirically successful signature predictions regarding the link between Exchange Rates and telltale signs of disaster risk in currency options.
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rare disasters and Exchange Rates
National Bureau of Economic Research, 2008Co-Authors: Emmanuel Farhi, Xavier GabaixAbstract:We propose a new model of Exchange Rates, which yields a theory of the forward premium puzzle. Our explanation combines two ingredients: the possibility of rare economic disasters, and an asset view of the Exchange rate. Our model is frictionless, has complete markets, and works for an arbitrary number of countries. In the model, rare worldwide disasters can occur and affect each country's productivity. Each country's exposure to disaster risk varies over time according to a mean-reverting process. Risky countries command high risk premia: they feature a depreciated Exchange rate and a high interest rate. As their risk premium mean reverts, their Exchange rate appreciates. Therefore, currencies of high interest rate countries appreciate on average. To make the notion of disaster risk more implementable, we show how options prices might in principle uncover latent disaster risk, and help forecast Exchange rate movements. We then extend the framework to incorporate two factors: a disaster risk factor, and a business cycle factor. We calibrate the model and obtain quantitatively realistic values for the volatility of the Exchange rate, the forward premium puzzle regression coefficients, and near-random walk Exchange rate dynamics. Finally, we solve a model of stock markets across countries, which yields a series of predictions about the joint behavior of Exchange Rates, bonds, options and stocks across countries. The evidence from the options market appears to be supportive of the model.
Kenneth Rogoff - One of the best experts on this subject based on the ideXlab platform.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2010Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:We show that “commodity currency” Exchange Rates have surprisingly robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policy makers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting Exchange Rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that Exchange Rates are strongly forward-looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.
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can Exchange Rates forecast commodity prices
National Bureau of Economic Research, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that “commodity currency” Exchange Rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. J.E.L. Codes: C52, C53, F31, F47. Key words: Exchange Rates, forecasting, commodity prices, random walk. Acknowledgements. We would like to thank C. Burnside, C. Engel, M. McCracken, R. Startz, V. Stavreklava, A. Tarozzi, M. Yogo and seminar participants at the University of Washington for comments. We are also grateful to various staff members of the Reserve Bank of Australia, the Bank of Canada, the Reserve Bank of New Zealand, and the IMF for helpful discussions and for providing some of the data used in this paper.
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can Exchange Rates forecast commodity prices
Quarterly Journal of Economics, 2008Co-Authors: Yuchin Chen, Kenneth Rogoff, Barbara RossiAbstract:This paper demonstRates that "commodity currency" Exchange Rates have remarkably robust power in predicting future global commodity prices, both in sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical Exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the Exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause Exchange Rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting Exchange Rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that Exchange Rates will be better predictors of exogenous commodity prices than vice-versa, because the Exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the Exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.
