The common component of bilateral US exchange rates

to what is it related?

Natalia Ponomareva, Jeffrey Sheen, Ben Zhe Wang*

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Using principal component analysis, we identify a common component driving a panel of 15 monthly bilateral exchange rates against the US dollar. We find this common (first principal) component is related to the fundamentals commonly used in exchange rate determination models, such as US nominal and real macroeconomic variables, financial market variables and commodity prices. We obtain the relevant set of fundamentals using the Lasso (least absolute shrinkage and selection operator) technique and find that this set changes over time.

Original languageEnglish
Pages (from-to)1251-1268
Number of pages18
JournalEmpirical Economics
Volume56
Issue number4
Early online date3 Jan 2018
DOIs
Publication statusPublished - Apr 2019

Keywords

  • Commodities
  • Exchange rate models
  • Lasso
  • Principal component analysis

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