https://github.com/asaficontact/fx_forecasting_model
Foreign Exchange Forecasting Model created for the paper "Can Interest Rate Factors Explain Rate Fluctuations?"
https://github.com/asaficontact/fx_forecasting_model
asset-pricing exchange-rates exchange-rates-forecasting financial-econometrics financial-economics forex forex-prediction interest-rates pandas principal-component-analysis yield-curve
Last synced: 3 months ago
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Foreign Exchange Forecasting Model created for the paper "Can Interest Rate Factors Explain Rate Fluctuations?"
- Host: GitHub
- URL: https://github.com/asaficontact/fx_forecasting_model
- Owner: asaficontact
- Created: 2020-09-12T20:14:59.000Z (over 4 years ago)
- Default Branch: master
- Last Pushed: 2022-12-05T17:34:12.000Z (over 2 years ago)
- Last Synced: 2025-03-17T13:34:28.134Z (3 months ago)
- Topics: asset-pricing, exchange-rates, exchange-rates-forecasting, financial-econometrics, financial-economics, forex, forex-prediction, interest-rates, pandas, principal-component-analysis, yield-curve
- Language: Python
- Homepage:
- Size: 667 KB
- Stars: 30
- Watchers: 3
- Forks: 18
- Open Issues: 0
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Metadata Files:
- Readme: README.md
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README
# Foreign Exchange Forecasting Model (for the paper): Can Interest Rate Factors Explain Exchange Rate Fluctuations?
The level, slope, and curvature of the yield curve are known predictors of excess bond
returns and economic activity, reflecting time variation in investors’ risk premia. In this
paper, I develop a term structure model under complete markets and no arbitrage that
describes exchange rate fluctuations as a function of these interest rate factors. The Gaussian
properties of the stochastic discount factors imply non-linearities in exchange rate risk premia
that can account for up to half of the in-sample variation in one-year currency returns for
different country pairs during the 1980s–2016 period. Interest rate factors can help explain
exchange rate fluctuations in and out of sample, particularly at longer horizons, and yield
profitable currency portfolios relative to standard carry trade strategies.
## Understanding the Code Files
* **main.py** contains the code for foreign exchange forecasting model.
* **data** folder contains all the data files required for running the forecasting model.
* **imports.py** contains imports of all python packages necessary for running the foreign exchange forecasting model code.
## More Info
* This code reproduces the out-of-sample forecasting exercise in Section 7, following Equation (B.37) derived in the [Online Appendix.](https://www.sciencedirect.com/science/article/abs/pii/S0927539821000050)
* **If you use the code, please cite the paper as follows:**
Yung, J., 2021. Can interest rate factors explain exchange rate fluctuations? Journal of Empirical Finance 61, 34-56.