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Common Factors and the Exchange Rate: Results From the Brazilian Case

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  • Rossi Junior, Jose Luiz
  • Felicio, Wilson Rafael de Oliveira

Abstract

This paper studies the usefulness of factor models in explaining the dynamics of the exchange rate Real / Dollar from January 1999 to August 2011. The paper verifies that the inclusion of factors embedded on the common movements of exchange rates of a set of countries significantly improves the in-sample and out-of-sample predictive power of the models comprising only macroeconomic fundamentals commonly used in the literature to forecast the exchange rate. The paper also links the information contained in the factors to global shocks as the demand for “dollars” – a dollar effect, volatility, and liquidity of global financial markets.

Suggested Citation

  • Rossi Junior, Jose Luiz & Felicio, Wilson Rafael de Oliveira, 2014. "Common Factors and the Exchange Rate: Results From the Brazilian Case," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(1), April.
    • Handle: RePEc:fgv:epgrbe:v:68:y:2014:i:1:a:7381
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    Cited by:

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    3. Cuiabano, Simone, 2017. "Long-run equilibrium exchange rate in Latin America and Asia: a comparison using cointegrated vector," TSE Working Papers 17-837, Toulouse School of Economics (TSE).

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