Journal of Applied Finance & Banking

Are Global Factors Useful for Forecasting the Exchange Rate?

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• Abstract

   

  This paper applies a common factors analysis framework to an exchange rate data panel, in order to better understand the forces behind exchange rate dynamics and provide a set of variables for exchange rate forecasting. Results demonstrate the model’s ability to extract key information to under-stand the driving forces of exchange rate movements using the exchange rate Brazilian Real to U.S. dollar; in addition, the model also shows statistically significant improvement in terms of forecasting performance in relation to the random walk benchmark as well as to traditional macroeconomic models found in economics literature.

   

  JEL classification numbers: F31, F37, F47.

  Keywords: Exchange rate, Common factors, Forecasting.