[Forum SIS] Università di Bergamo - Seminario Jean-Marie Dufour

[Annamaria Bianchi]

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*Mercoledì 16 Dicembre 2015 *
*Università di Bergamo,*
*via dei Caniana 2, Bergamo*
*Aula 16*
*Ore: 12:00 p.m.*
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*"**Exchange rates and commodity prices: measuring causality at multiple
horizons**"*

*Prof. Jean-Marie Dufour(McGill University, Canada)*


*Abstract*: Understanding and measuring the relative roles of different
causal channels between commodity prices and exchange rates has important
implications in financial decision making, especially for market
participants with short horizons. From a macroeconomic perspective, this
can also be useful for interpreting exchange rate movements, financial
market monitoring and monetary policy. Basic economic reasoning on currency
demand suggests that the currencies of countries whose exports depend
heavily on a particular commodity should be strongly influenced by its
price, so commodity price movements should lead (Granger-cause) exchange
rate movements (macroeconomic/trade mechanism). In contrast, the present
value model of forward-looking exchange rates suggests reverse causation,
i.e. exchange rates should Granger-cause commodity prices (expectations
mechanism). We examine empirically the causal relationship between
commodity prices and exchange rates, using data on three commodities (crude
oil, gold, copper) and three countries (Canada, Australia, Chile), over the
period 2000-2009. To go beyond pure significance tests of non-causality and
to provide a relatively complete picture of the links, measures of the
strength of causality for different horizons and directions are estimated
and compared. Since low-frequency data may easily fail to capture important
features of the relevant causal links in volatile financial markets – such
as foreign exchange and commodity markets – high-frequency (daily and
5-minute) data are exploited. Both unconditional and conditional (given
general stock market conditions) causality measures are considered, and
allowance for “dollar effects” is made by considering non-U.S. dollar
variables. We identify clear causal patterns: (1) Granger causality between
commodity prices and exchange rates is visible in both directions; (2) it
is stronger at short horizons, and becomes weaker as the horizon increases;
(3) causality from commodity prices to exchange rates is stronger than
causality in the reverse direction across multiple horizons: the ratios of
causality measures in two different directions can be quite high (for
example, as high as 5 or 10 in favor of causation from commodity prices to
exchange rates), especially at short horizons; (4) eliminating dollar
effects weakens causality from exchange rates to commodity prices, and
reveals a more definite pattern where causality from commodity prices to
exchange rates dominates across multiple horizons. In contrast with earlier
results on the non-predictability of exchange rates, we find that the
macroeconomic/trade-based mechanism plays a central role in exchange rate
dynamics, despite the financial features of these markets.


Cordiali saluti,

Annamaria Bianchi e Giovanni Urga
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