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Forecasting the Norwegian Krone exchange rate using the oil price : a trader's and a statistician's perspective

Karlsen, Johan L.S.; Mjøen, Morten B.
Master thesis
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URI
http://hdl.handle.net/11250/2382625
Date
2015
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  • Institutt for samfunnsøkonomi [769]
Abstract
In the past nearly one year, there has been a 30% depreciation of the Norwegian currency.

The dramatic fall in the oil price is blamed to be the key reason since the oil price drop can be

considered as an exogenous shock to the oil dependent Norwegian economy. If this is true,

can the oil price predict movements in the Norwegian krone? We examine this issue from two

different perspectives. First, we use high frequency data such as daily and hourly to simulate

simple strategies involving blindly trading the dollar based on signals given by the oil price.

We find that when using the direction of change in the oil price as a predictor for the direction

of change in the USD/NOK exchange rate we are able earn higher risk-adjusted returns than a

simple buy and hold strategy. Second, in spirit of Ferraro et al. (2015), we try to forecast daily

and hourly changes in the exchange rate using oil price changes as the only predictor. We find

that contemporaneous changes in the oil price significantly outperforms the random walk in

terms of forecasting ability, while lagged changes in the oil price yield indistinct results

highly dependent on the timing of the exchange rate data.
Publisher
NTNU

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