Commodity index construction and the predictive power of exchange rates

Lasse Bork, Pablo Rovira Kaltwasser, Piet Sercu

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review


In the Engel and West (2005) exchange rate literature, some hold that commodity prices should be predicted by exchange rates and not vice-versa. This hypothesis runs counter to a vast literature that regards commodities
as financial assets, whose price changes are normally hard to predict. Prior empirical results have not lead to a consensus. Some commonly used indices have features that create biases in tests like ours, we show. Furthermore, we suggest a new index weighting scheme that should improve one’s chances of unearthing predictive power, if any. We also try higher frequencies, principal components indices, model averaging and trading rules — all to no avail: we find no asymmetric predictive ability either way, and the link is essentially contemporaneous.
TidsskriftJournal of Banking and Finance
Sider (fra-til)1
Antal sider49
StatusAfsendt - 2019


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