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)
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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 |
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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 |
Copyright Holders: | Copyright © 2018 Elsevier |
First Published: | First published in Journal of International Money and Finance 95:379-401 |
Publisher Policy: | Reproduced in accordance with the copyright policy of the publisher |
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