A Survey of Empirical Research on Nominal Exchange Rates

Frankel, Jeffrey A.; Rose, Andrew K.

doi:10.3386/w4865

Cited by 292 publications

(316 citation statements)

References 131 publications

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“…The literature on exchange rate forecasting is fairly long, but we have not attempted to provide an overview here. See, for example, Frankel and Rose (1995) for a survey.the global NN approach may be superior to the local nonparametric approach. These studies, however, include no market fundamentals as explanatory variables in the forecasting equation and are therefore essentially nonlinear univariate time series analysis.…”

Section: Introductionmentioning

confidence: 99%

Nonlinear prediction of exchange rates with monetary fundamentals

2003

Journal of Empirical Finance

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Section: Introductionmentioning

confidence: 99%

Nonlinear prediction of exchange rates with monetary fundamentals

2003

Journal of Empirical Finance

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“…This disconnect is surprising, given the fact that foreign exchange markets react to changes in economic fundamentals within minutes (Andersen, Bollerslev, Diebold, and Vega, 2003) and that exchange rates reflect long-term changes in purchasing power (Taylor and Taylor, 2004). At intermediate horizons, however, the relationship between fundamentals and exchange rates seems to be largely unobservable, possibly even non-existent (Frankel and Rose, 1995;Rogoff, 2007). In this paper we suggest a new approach to uncovering potential connections, and provide evidence that fundamentals may indeed shape exchange rates.…”

Section: Introductionmentioning

confidence: 99%

Individual Exchange Rate Forecasts and Expected Fundamentals

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11062.pdf Non-technical SummaryExchange rates are one of the most important prices in open economies. Despite their great importance for many enterprises, surprisingly little is known about the economic factors influencing the ups and downs of exchange rates at intermediate horizons. Although several theoretical macroeconomic models do identify potential determinants of exchange rates, empirical studies since the mid-1980s have found that these models do not make more accurate medium-term forecasts than random forecasts. This empirical finding has led to the conclusion that exchange rates and fundamentals are unrelated in the medium term. However, the complexity of currency markets (with heterogeneous market participants or time-variant influencing factors) could conceal a potential relation between economic fundamentals and exchange rates.The present study takes an indirect approach to investigating whether exchange rates are formed based on fundamentals. The defining idea behind our study is to analyze individual forecasts without making assumptions regarding the forecaster's macroeconomic models. Instead, we judge individual forecasts by their forecast ability only. We assume that good exchange rate forecasts are generally based on better information, and analyze whether this information is macroeconomic. To this end, we take a look at the forecast ability of individual forecasts for the USD/EUR exchange rate in conjunction with the forecast ability of associated short-term interest rate forecasts.We view the significant, positive relationship between good exchange rate forecasts (on a one-month horizon) and good interest rate forecast as evidence that exchange rate forecasts benefit from a better interpretation of the macroeconomic reality. This requires a fundamental linkage between exchange rates and macroeconomic variables.If this linkage exists, it should vary in its importance across different market phases. Our further analyses indeed indicate that a correlation between exchange rates and interest rates is especially important when there is an obvious fundamental misalignment between the respective countries. This is the case when there is a great difference between exchange rates and their fundamental values (based on purchasing power parity), when interest rate differences between the two currencies are large, and when exchange rates do not exhibit a strong tren...

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“…Besides, unlike equities markets where trading volume must be disclosed on a regular basis, the only information source on aggregated trading volume is the BIS Triennial Central Bank Survey, which is updated every three years. 6 …”

Section: Interdealer Marketmentioning

confidence: 99%

“…However, no one has yet been able to uncover macroeconomic fundamentals that could explain a modest fraction of the changes of the exchange rate in the real world [5]. Frankel and Rose describe the traditional empirical research on exchange rate as "… the case for macroeconomic determinants of exchange rates is in a sorry state" [6]. Since the mid-1990s, with the availability of proprietary data from the large dealing banks, research on foreign exchange microstructure, or so-called "the new micro exchange rates economics" [5], has accelerated.…”

Section: Introductionmentioning

confidence: 99%

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

Su¹,

Zhao²

2017

JFE

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Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation accelerates. This formerly two-tier market (namely, the interdealer and customer market) is now evolving into a multi-tier market and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have almost tripled to 5.3 trillion dollars daily according to Bank for International Settlements 2013. Market concentration among dealers has risen reflecting the heavy investments in technology. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to market regulation and exchange rate modelling.

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A Survey of Empirical Research on Nominal Exchange Rates

Abstract: NBER Working Paper #4865 September 1994 conclude with the hope that promising new studies of the microstructure of the foreign exchange market might eventually rise to insights into these phenomena.

Cited by 292 publications

References 131 publications

Nonlinear prediction of exchange rates with monetary fundamentals

Nonlinear prediction of exchange rates with monetary fundamentals

Individual Exchange Rate Forecasts and Expected Fundamentals

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

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