On the driving forces of real exchange rates: Is the Japanese Yen different?

Paulo Fraga Martins Maio, Ming Zeng*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review


We estimate variance decompositions of the real exchange rate (q) for 19 currencies based on a present-value relation. At very short horizons, the driving force of q is predictability of the future exchange rate. At long horizons, return predictability drives most variation in q, with predictability of interest differentials playing a secondary role. This pattern is especially strong for the Non-G10 currencies. However, the long-run predictability mix associated with the Japanese Yen clearly deviates from the other currencies and is unstable over time. The quantitative simulation of a liquidity-based exchange rate model largely replicates our main empirical findings.

Original languageEnglish
Article number101423
Peer-reviewed scientific journalJournal of Empirical Finance
Publication statusPublished - 19.09.2023
MoE publication typeA1 Journal article - refereed


  • 512 Business and Management
  • Calibration and simulation
  • Currency return and interest spread predictability
  • Japanese Yen
  • Liquidity premium
  • Present-value relation
  • Variance decompositions


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