Oil prices and experts’ forecasts of seven exchange rates

ABSTRACT

Research indicates that survey-based forecasts of exchange rates fail to be rational. In addition, the literature points to oil prices as a key factor in determining/predicting exchange rates. We investigate these two research topics by focusing on Blue Chip multi-month forecasts of seven exchange rates for 1999–2015. Our investigation utilizes the recent forecast evaluation method that allows for the possibility of asymmetric loss. We show that Blue Chip forecasts, while free of systematic bias, cannot beat the random walk benchmark, and, at some forecast horizons, the errors fail to be orthogonal to changes in oil prices. We further show that, for four out of seven exchange rates, the change in oil prices explains the information content difference between the Blue Chip and random walk forecasts. Put together, our findings suggest that the inaccuracy of Blue Chip forecasts may be in part due to an inefficient use of oil price information available at the time of the forecast and, thus, forecasters should pay special attention to oil price movements when forecasting exchange rates.

KEYWORDS:

• Foreign exchange
• oil prices
• blue chip survey
• flexible loss
• rationality

JEL CLASSIFICATION:

• F31
• F37
• Q43

Acknowledgments

The authors would like to thank two anonymous reviewers for helpful comments and suggestions.

Disclosure statement

This is to acknowledge that NO financial interest or benefit that has arisen from the direct applications of this research.

Notes

¹ See, among others, Huang and Guo (2007), Benhmad (2012), Beckmann and Czudaj (2013), Reboredo, Rivera-Castro, and Zebende (2014), Atems, Kapper, and Lam (2015), Balcilar, Hammoudeh, and Asaba (2015), Basher, Haug, and Sadorsky (2016), Chen et al. (2016), Zhang, Dufour, and Galbraith (2016), and Yang, Cai, and Hamori (2017).

² Previous participants include the Industrial Bank of Japan which was replaced by the Mizuho Research Institute in May 2002, and Merrill Lynch which was replaced by WestLB in June 2004.

³ The historical Blue Chip Financial Forecasts were purchased from Aspen Publishers, Inc. For a current study, which uses Blue Chip survey data, see Nakamura and Steinsson (2018). Daily data on the spot prices of WTI and Brent crude come from the Federal Reserve Bank of St. Louis database (FRED). Daily data on the spot price of Dubai crude come from the Bloomberg database.