Does Term Spread Predict the Swings in Exchange Rate?
Date Issued
2012
Date
2012
Author(s)
Hsu, Cheng-Che
Abstract
This paper follows the emprical models from Chen (2011), using monthly data from 12 developed country to predict the swings in exchange rate (major trends in depreciation or appreiation). In our research, term spread is treated as the key variable to construct the empirical model. Because its sensitivity to the market information is quite strong, it would expected to increase the explanatory power of the exchange rate swing. We also consider a model without term spread to compare the marginal effect, and a model with interest rate instead of term spread. In addtion to our model, we also apply monetary model, purchase power parity model and Taylor rule model with interest rate smoothing for robustness. Although our model do not being very suceccful at all horizon on all country, however, our empirical result shows the term spread model performs better on long-horizon forecasting. Out result provides a reliable prediction for future exchange rate trends.
Subjects
exchange rate forecasting
exchange rate swings
term spread
Type
thesis
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