Greenaway-McGrevy, Ryan; Mark, Nelson C.; Sul, Donggyu; Wu, Jyh-Lin Identifying exchange rate common factors. (English) Zbl 1419.91505 Int. Econ. Rev. 59, No. 4, 2193-2218 (2018). Summary: Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, U.S., and euro-zone stochastic discount factors. The identified factors can also be given a risk-based interpretation. Identification motivates multilateral models for bilateral exchange rates. Out-of-sample forecast accuracy of empirically identified multilateral models dominates the random walk and a bilateral purchasing power parity fundamentals prediction model. Twenty-four-month-ahead forecast accuracy of the multilateral model dominates those of a principal components forecasting model. Cited in 4 Documents MSC: 91B64 Macroeconomic theory (monetary models, models of taxation) 62P20 Applications of statistics to economics 62M20 Inference from stochastic processes and prediction Keywords:exchange rate returns; stochastic discount factors; principal components forecasting PDFBibTeX XMLCite \textit{R. Greenaway-McGrevy} et al., Int. Econ. Rev. 59, No. 4, 2193--2218 (2018; Zbl 1419.91505) Full Text: DOI Link