Can Tail Risk Predict Asia-Pacific Exchange Rates Out of Sample?

Abstract

We present novel evidence to show that tail (market) risk, measured as the conditional autoregressive value at risk, is a good predictor of Asia-Pacific exchange rates. We use daily exchange rate data for the Australian dollar, the Chinese yuan, the Indonesian rupiah, the Japanese yen, the Malaysian ringgit, the New Zealand dollar, the Philippine peso, and the Singapore dollar each against the US dollar, the pound sterling, and the euro between January 3, 2007, and March 8, 2021. Impact analyses suggest hedging benefits for investors in US dollar–denominated exchange rates, especially in advanced Asia-Pacific countries. Superior out-of-sample forecast performance appears to supersede the Meese–Rogoff puzzle.