Foreign Exchange Rates Don't Follow a Random Walk
48 Pages Posted: 17 Mar 2005
Date Written: August 2005
We find that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. This relation is highly significant for most foreign currencies in both in-sample and out-of-sample forecasting tests. We also document a positive and significant relation between a country's idiosyncratic volatility and the future U.S. dollar price of its currency - in France, Germany, and Japan. Given that idiosyncratic volatility forecasts GDP growth in both U.S. and foreign countries, our results appear to be consistent with monetary models of exchange rates.
Keywords: Exchange rate predictability, average idiosyncratic volatility, monetary model
JEL Classification: F31, G1
Suggested Citation: Suggested Citation