This paper proposes a novel asymptotic least-squares estimator of multi-country Gaussian dynamic term structure models that is easy to compute and asymptotically efficient, even when the number of countries is relatively large - a situation in which other recently proposed approaches lose their...

This paper uses information contained in the cross-country yield curves to test the asset-pricing approach to exchange rate determination, which models the nominal exchange rate as the discounted present value of its expected future fundamentals. Since the term structure of interest rates...

We investigate whether unemployment fluctuations generate predictability in the cross-section of currency excess returns. We find that currencies with lower growth in the unemployment rate appreciate while currencies with higher growth in the unemployment rate depreciate. As a result, an...

Traditional exchange rate models are based on differences in macroeconomic fundamentals. However, despite being well grounded in economic theory they have a rather poor out-of sample forecasting record. This empirical failure may be a result of the overly restrictive choice of macroeconomic...

In a no-arbitrage framework, any variable that affects the pricing of the domestic yield curve has the potential to predict foreign exchange risk premiums. The most widely used interest rate predictor is the difference in short rates across countries, known as carry, but the short rate is only...

This paper extends the benchmark Estrella and Hardouvelis (1991) term spread approach to recession forecasting by including the stock market macro liquidity deviation factor. We use a probit framework to predict US business cycles, as defined by the NBER between 1959Q1 and 2011Q4. We find that...

We document a drift in exchange rates before monetary policy changes across major economies. Currencies tend to depreciate by 0.7 percent over ten days before policy rate cuts and appreciate by 0.5 percent before policy rate increases. We show that available fixed income instruments allow to...

This paper presents new stylized facts about exchange rates and their relationship with macroeconomic fundamentals. We show that macroeconomic surprises explain a large majority of the variation in nominal exchange rate changes at a quarterly frequency. Using a novel present value decomposition...

In this paper, we examine the forecasting ability of an affine term structure framework that jointly models the markets for Treasuries, inflation-protected securities, inflation derivatives, and oil future prices based on no-arbitrage restrictions across these markets. On the methodological...

We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the...