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Idiosyncratic variation of the US Dollar

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  • Kunkler, Michael
  • MacDonald, Ronald

Abstract

We address the role of the US dollar when constructing a set of systematic (statistical) factors from a group of US dollar exchange rates. Researchers usually regard the US dollar as wholly systematic. In this paper, however, we are able to decompose the US dollar and other currencies into systematic and idiosyncratic factors using the global prices for currencies, rather than US dollar exchange rates. Using monthly data over a period of more than 44 years, we find that approximately 25% of the total variation for the US dollar can be attributed to idiosyncratic variation.

Suggested Citation

  • Kunkler, Michael & MacDonald, Ronald, 2016. "Idiosyncratic variation of the US Dollar," Economics Letters, Elsevier, vol. 144(C), pages 7-9.
    • Handle: RePEc:eee:ecolet:v:144:y:2016:i:c:p:7-9
    DOI: 10.1016/j.econlet.2016.04.021
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    References listed on IDEAS

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    1. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar..
    2. Kunkler, Michael & MacDonald, Ronald, 2015. "Half-lives of currencies and aggregation bias," Economics Letters, Elsevier, vol. 135(C), pages 58-60.
    3. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    4. Mahieu, Ronald & Schotman, Peter, 1994. "Neglected common factors in exchange rate volatility," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 279-311, July.
    5. Andrew Harvey & Esther Ruiz & Neil Shephard, 1994. "Multivariate Stochastic Variance Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 247-264.
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    More about this item

    Keywords

    Exchange rates; Currency variation; Statistical factor models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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