FOREX & FUNDAMENTALS
Exchange Rates and Fundamentals
| Coordinatore | EUROPEAN UNIVERSITY INSTITUTE
Organization address
address: Via dei Roccettini 9 contact info |
| Nazionalità Coordinatore | Italy [IT] |
| Totale costo | 83˙869 € |
| EC contributo | 83˙869 € |
| Programma | FP7-PEOPLE
Specific programme "People" implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013) |
| Code Call | FP7-PEOPLE-2009-IEF |
| Funding Scheme | MC-IEF |
| Anno di inizio | 2010 |
| Periodo (anno-mese-giorno) | 2010-05-01 - 2011-04-30 |
Partecipanti
| # | ||||
|---|---|---|---|---|
| 1 |
EUROPEAN UNIVERSITY INSTITUTE
Organization address
address: Via dei Roccettini 9 contact info |
IT (FIESOLE) | coordinator | 83˙869.70 |
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Obiettivo del progetto (Objective)
'This proposal builds upon the seminal work of Engel & West (JPE, 2005) on the relationship between FX rates (FXRs) & fundamentals (FMs). They deal with the long-standing puzzle in international economics, which is the difficulty of linking floating FXRs to macroeconomic FMs. In this project, we take a new line of attack on the question of co-movement between FXRs & FMs as well as between FXRs. We work with the class of asset-pricing models of Engel & West (EW). We attempt to empirically verify their theoretical conclusion that large discount factors account for random walk behavior in FXRs. We also deal with the following: if the FX models imply RW behavior, so that their changes are unpredictable, how then can we validate the models? The study investigates different forecasting horizons & frequencies of the 6 “FX majors” & differentials of Macro-FMs relative to US. The project develops in three phases; first we explore the “nature” & direction of FXRs-FMs causality. Then a new linear/nonlinear causality-based model selection methodology is introduced & applied to forecasting. Finally, the causality-based criteria are compared to well-known methods & forecast measures. We extend the various linear multivariate models of EW towards nonlinear ones with time-varying parameters, structural breaks, regime switches & Bayesian estimation. The recent evidence on causality is based on the linear parametric Granger test, although it has low power against nonlinear alternatives. The nonparametric test by Hiemstra-Jones (1994), which is a modified version of the Baek-Brock’s (1992), is regarded a test for nonlinear dynamic causal relationship. We employ a multi-step empirical methodology as in Bekiros & Diks (2008), using multivariate VAR/VECM/GARCH filtering combined with linear & nonlinear causality tests. Improved knowledge of the direction & nature of causalities will expand the information set available to policymakers for decision-making.'