Forecasting foreign exchange rates using idiosyncratic volatility |
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Authors: | Hui Guo Robert Savickas |
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Institution: | 1. College of Business Administration, University of Cincinnati, Cincinnati, OH 45221, USA;2. Department of Finance, George Washington University, 2023 G Street, N.W., Washington, DC 20052, USA |
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Abstract: | Average idiosyncratic stock volatility forecasts the bilateral exchange rates of the US dollar against major foreign currencies in and out of sample. The US dollar tends to appreciate after an increase in US idiosyncratic volatility. Similarly, ceteris paribus, German and Japanese idiosyncratic volatilities positively and significantly correlate with future US dollar prices of the Deutsche mark and the Japanese yen, respectively. Our results suggest that exchange rates are predictable. |
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Keywords: | F31 G1 |
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