Common factors and the exchange rate: results from the Brazilian case

Are Global Factors Useful for Forecasting the Exchange Rate?

“…The paper goes one-step ahead and studies the main determinants of the comovements in the exchange rates. The paper extends the results of Felício and Rossi (2014) verifying the robustness of the results, including more explanatory variables, and analyzing the behavior of the exchange rate during the Covid-19 pandemic, a period when the global economy underwent a significant shock. In addition, the Brazilian Real brings an exceptional case study.…”

“…This paper follows a different line from the aforementioned models and propositions, using principal factors in order to extract common components from exchange rate fluctuations of 18 countries, starting from a time after Brazil's adoption of the free floating exchange rate regime in order to obtain relevant information with regard to exchange rate forecasting. It is expected that a parsimonious number of factors be related to non-observable variables whose movements influence exchange rate dynamics in a meaningful way (Groen 2006;Felício and Rossi Júnior, 2014). Vector Autoregression (VAR) methods may not be appropriate when using sizeable panel data.…”

Brazilian Exchange Rate Forecasting in High Frequency

“…and it can explain part of the daily variation of the nominal exchange rate (Kohlscheen et al (2017)). Motivated by Felício and Rossi Júnior (2014), who extract common factors from a set of floating exchange rates and assess their predictive capacity, we consider 17 foreign exchange rates as possible predictors. We also investigate gold as a possible predictor, due to a possible bi-directional causal relationship with exchange rates in emerging countries (Gürış and Kiran (2014), Nair et al (2015)).…”