Which FX Valuation Models Work Best?
(5 min read)
While most markets like equities and bonds have well-established valuation models, FX markets often baffle people. What anchors the value of a currency? Well, there are a number of valuation approaches: Purchasing Power Parity (PPP), Behavioural Equilibrium Exchange Rate (BEER), and the Macroeconomic Balance (MB). But which is best? A new ECB paper, The predictive power of equilibrium exchange rate models, puts these three to the test. It finds that the simplest, PPP, is probably the winner, while the more complex and much favoured MB is the least useful...
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