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The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to?

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  • Ponomareva, Natalia
  • Sheen, Jeffrey
  • Wang, Ben

Abstract

We identify a common factor driving a panel of fifteen monthly bilateral exchange rates against the U.S. dollar. We find this factor is closely related to U.S. nominal and real macroeconomic variables, financial market variables and commodity prices. Our results suggest this common factor is broadly related to the macroeconomic fundamentals in the Taylor rule and uncovered interest parity models. However, the set of fundamentals relevant to these models changes over time.

Suggested Citation

  • Ponomareva, Natalia & Sheen, Jeffrey & Wang, Ben, 2015. "The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to?," MPRA Paper 68966, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68966
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    More about this item

    Keywords

    Principal Component Analysis; Exchange Rate Models;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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