Forecasting Errors, Directional Accuracy and Profitability of Currency Trading: The Case of EUR/USD Exchange Rate

Costantini M, Crespo Cuaresma J, & Hlouskova J (2016). Forecasting Errors, Directional Accuracy and Profitability of Currency Trading: The Case of EUR/USD Exchange Rate. Journal of Forecasting 35 (7): 652-668. DOI:10.1002/for.2398.

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Abstract

We provide a comprehensive study of out-of-sample forecasts for the EUR/USD exchange rate based on multivariate macroeconomic models and forecast combinations. We use profit maximization measures based on directional accuracy and trading strategies in addition to standard loss minimization measures. When comparing predictive accuracy and profit measures, data snooping bias free tests are used. The results indicate that forecast combinations, in particular those based on principal components of forecasts, help to improve over benchmark trading strategies, although the excess return per unit of deviation is limited.

Item Type: Article
Uncontrolled Keywords: exchange rate forecasting; forecast combination; multivariate time series models; profitability
Research Programs: World Population (POP)
Depositing User: Michaela Rossini
Date Deposited: 29 Mar 2016 12:25
Last Modified: 30 Mar 2017 09:08
URI: http://pure.iiasa.ac.at/12332

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