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The common component of bilateral US exchange rates: to what is it related?

Author

Listed:
  • Natalia Ponomareva

    (Macquarie University)

  • Jeffrey Sheen

    (Macquarie University)

  • Ben Zhe Wang

    (Macquarie University)

Abstract

Using principal component analysis, we identify a common component driving a panel of 15 monthly bilateral exchange rates against the US dollar. We find this common (first principal) component is related to the fundamentals commonly used in exchange rate determination models, such as US nominal and real macroeconomic variables, financial market variables and commodity prices. We obtain the relevant set of fundamentals using the Lasso (least absolute shrinkage and selection operator) technique and find that this set changes over time.

Suggested Citation

  • Natalia Ponomareva & Jeffrey Sheen & Ben Zhe Wang, 2019. "The common component of bilateral US exchange rates: to what is it related?," Empirical Economics, Springer, vol. 56(4), pages 1251-1268, April.
    • Handle: RePEc:spr:empeco:v:56:y:2019:i:4:d:10.1007_s00181-017-1395-2
    DOI: 10.1007/s00181-017-1395-2
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    Cited by:

    1. Raheem, Ibrahim, 2020. "Global financial cycles and exchange rate forecast: A factor analysis," MPRA Paper 105358, University Library of Munich, Germany.
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    3. Long Hai Vo, 2021. "Understanding International Price and Consumption Disparities," Economics Discussion / Working Papers 21-01, The University of Western Australia, Department of Economics.
    4. Long Hai Vo, 2023. "Understanding International Price and Consumption Disparities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 69(2), pages 443-473, June.
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    6. Ponomareva, Natalia & Sheen, Jeffrey & Wang, Ben Zhe, 2019. "Forecasting exchange rates using principal components," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Principal component analysis; Exchange rate models; Lasso; Commodities;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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