The term structure of exchange rate predictability: commonality, scapegoat, and disagreement

Cao, S., Huang, H., Liu, R. and MacDonald, R. (2019) The term structure of exchange rate predictability: commonality, scapegoat, and disagreement. Journal of International Money and Finance, 95, pp. 379-401. (doi:10.1016/j.jimonfin.2018.03.013)

Cao, S., Huang, H., Liu, R. and MacDonald, R. (2019) The term structure of exchange rate predictability: commonality, scapegoat, and disagreement. Journal of International Money and Finance, 95, pp. 379-401. (doi:10.1016/j.jimonfin.2018.03.013)

Full text not currently available from Enlighten.

Abstract

In this paper, we study the exchange rate predictability across a range of investment horizons by proposing a generalized (term structure) model to capture the dynamics between the risk premium component of exchange rates and a broad set of variables meanwhile handle both parameter and model uncertainty. We also demonstrate the projections of common predictable information over the term structure, and existence of time-varying term-structural effect and model disagreement effect of exchange rate predictors in FX trading, which in turn validates the practical use of our model. We then utilize the time-variation in the probability weighting to identify the scapegoat drivers of customer order flows. We further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees of 6.5% per annum.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: Cao, S., Huang, H., Liu, R., and MacDonald, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of International Money and Finance
Publisher:Elsevier
ISSN:0261-5606
ISSN (Online):1873-0639
Published Online:22 March 2018

University Staff: Request a correction | Enlighten Editors: Update this record