The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to?

Ponomareva, Natalia and Sheen, Jeffrey and Wang, Ben (2015): The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to?

Abstract

We identify a common factor driving a panel of fifteen monthly bilateral exchange rates against the U.S. dollar. We find this factor is closely related to U.S. nominal and real macroeconomic variables, financial market variables and commodity prices. Our results suggest this common factor is broadly related to the macroeconomic fundamentals in the Taylor rule and uncovered interest parity models. However, the set of fundamentals relevant to these models changes over time.

• Item Type: MPRA Paper
• Language: English
• Keywords: Principal Component Analysis; Exchange Rate Models
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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