Empirical Economics

, Volume 56, Issue 4, pp 1251–1268 | Cite as

The common component of bilateral US exchange rates: to what is it related?

  • Natalia Ponomareva
  • Jeffrey Sheen
  • Ben Zhe WangEmail author


Using principal component analysis, we identify a common component driving a panel of 15 monthly bilateral exchange rates against the US dollar. We find this common (first principal) component is related to the fundamentals commonly used in exchange rate determination models, such as US nominal and real macroeconomic variables, financial market variables and commodity prices. We obtain the relevant set of fundamentals using the Lasso (least absolute shrinkage and selection operator) technique and find that this set changes over time.


Principal component analysis Exchange rate models Lasso Commodities 

JEL Classification

C52 C53 F31 F47 


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  • Natalia Ponomareva
    • 1
  • Jeffrey Sheen
    • 1
  • Ben Zhe Wang
    • 1
    Email author
  1. 1.Department of Economics, Faculty of Business and EconomicsMacquarie UniversitySydneyAustralia

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