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Frontiers of Economics in China

Front. Econ. China    2020, Vol. 15 Issue (2) : 179-210     https://doi.org/10.3868/s060-011-020-0009-5
Orginal Article
A Bayesian Nonparametric Investigation of the Predictive Effect of Exchange Rates on Commodity Prices
Xin Jin()
School of Economics, Shanghai University of Finance and Economics (SUFE), Shanghai 200433, China; Key Laboratory of Mathematical Economics (SUFE), Ministry of Education, Shanghai 200433, China
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Abstract

This study proposes a full Bayesian nonparametric procedure to investigate the predictive power of exchange rates in relation to commodity prices for three commodity-exporting countries: Canada, Australia, and New Zealand. We propose a new time-dependent infinite mixture of a normal linear regression model of the conditional distribution of the commodity price index. The mixing weights follow a set of Probit stick-breaking priors that are time-varying. We find that exchange rates have a positive predictive effect in general, but accounting for time variation does not improve forecasting performance. By contrast, the intercept in the regression and the lagged dependent variable show signs of parameter change over time in most cases, which is important in forecasting both the mean and the density of commodity prices one period ahead. The results also suggest that the variance is a large source of the time variation in the conditional distribution of commodity prices.

Keywords Bayesian nonparametrics      Dirichlet process mixture      stick-breaking process      Markov China Monte Carlo (MCMC)      predictive likelihood      foreign exchange rate      commodity price     
Issue Date: 10 July 2020
 Cite this article:   
Xin Jin. A Bayesian Nonparametric Investigation of the Predictive Effect of Exchange Rates on Commodity Prices[J]. Front. Econ. China, 2020, 15(2): 179-210.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-011-020-0009-5
http://journal.hep.com.cn/fec/EN/Y2020/V15/I2/179
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