Can Oil Prices Forecast Exchange Rates?

Abstract

This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S dollar nominal exchange rate. Despite state-of-theart methodologies, we …nd little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether we use contemporaneous (realized) or lagged oil prices in our regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.J.E.L. Codes: F31, F37, C22, C53.

Common factors and the exchange rate: results from the Brazilian case

“…West (1996) points out that this type of exercise is useful for the evaluation of the predictability of a model given the path of the variables. Ferraro et al (2012) argue that if the goal of the exercise is to demonstrate the usefulness of the addition of a fundamental -in our case, the common factors -this forecasting strategy would be more appropriate. In their case, they advocate this strategy given the difficult in forecasting oil prices -their additional fundamental.…”

“…First, since conventional tests usually do not reject the presence of unit root in the variables, one could use a model in levels instead of differences (error-correction models). Ferraro et al (2012) argue that error-correction models supply more gains for lower than for higher frequencies. Given that exchange rate forecast is more difficult for higher frequencies we rather use models like (1).…”

“…We follow Ferraro et al (2012) and perform a rolling windows "out-of-sample" forecasting exercise using equation (1). Chen et al (2010) argue that the rolling window scheme is more robust with respect to a possible time-variation of the parameters because it adapts more quickly to possible structural changes when compared to a recursive scheme.…”

Dynamic Relationship of Commodities Prices and EUR/USD Exchange Rate Trends in the Recent Past

“…• [4] investigated the relationships between the price of oil and the Canadian/USD exchange rate. The results show that in the long term (using monthly data) there is no stable relationship.…”

“…• [6] analyzed the dynamic relationship between the price of oil, exchange rate 4 and the price of shares 5 through the implementation of a vector autoregression model. The results obtained show that positive shocks in oil prices tend, in the short term, to depress the stock price and the exchange rate, while positive shocks in oil production tend to lower the oil price, and positive shocks on the real economic activity, instead, typically induce the oil price to rise.…”