Forecasting errors, directional accuracy and profitability of currency trading: The case of EUR/USD exchange rate

Mauro Costantini, Jesus Crespo Cuaresma, Jaroslava Hlouskova

Publication: Scientific journalJournal articlepeer-review

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.
Original languageEnglish
Pages (from-to)652 - 668
JournalJournal of Forecasting
Volume35
Issue number7
DOIs
Publication statusPublished - 2016

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