Forecasting Errors,Directional Accuracy and Profitability of Currency Trading: The Case of EUR/USD Exchange Rate |
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| Authors: | Mauro Costantini Jesus Crespo Cuaresma Jaroslava Hlouskova |
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| Affiliation: | 1. Department of Economics and Finance Brunel University London, UK;2. Department of Economics, Vienna University of Economics and Business, Austria;3. Wittgenstein Centre for Demography and Global Human Capital (WIC), Vienna, Austria;4. World Population Program, International Institute of Applied Systems Analysis (IIASA), Laxenburg, Austria;5. Austrian Institute for Economic Research (WIFO), Vienna, Austria;6. Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria;7. Department of Economics, Thompson Rivers University, Kamloops, Canada |
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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. Copyright © 2016 John Wiley & Sons, Ltd. |
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| Keywords: | exchange rate forecasting forecast combination multivariate time series models profitability |
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