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Non-linear, non-parametric, non-fundamental exchange rate forecasting

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Author Info

  • Jing Yang

    (Financial Markets Department, Bank of Canada, Ottawa, Ontario, Canada)

  • Nikola Gradojevic

    (Faculty of Business Administration, Lakehead University, Thunder Bay, Ontario, Canada)

Abstract

This paper employs a non-parametric method to forecast high-frequency Canadian|US dollar exchange rate. The introduction of a microstructure variable, order flow, substantially improves the predictive power of both linear and non-linear models. The non-linear models outperform random walk and linear models based on a number of recursive out-of-sample forecasts. Two main criteria that are applied to evaluate model performance are root mean squared error (RMSE) and the ability to predict the direction of exchange rate moves. The artificial neural network (ANN) model is consistently better in RMSE to random walk and linear models for the various out-of-sample set sizes. Moreover, ANN performs better than other models in terms of percentage of correctly predicted exchange rate changes. The empirical results suggest that optimal ANN architecture is superior to random walk and any linear competing model for high-frequency exchange rate forecasting. Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.986
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 25 (2006)
Issue (Month): 4 ()
Pages: 227-245

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Handle: RePEc:jof:jforec:v:25:y:2006:i:4:p:227-245

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Cited by:
  1. Kajal Lahiri & Liu Yang, 2012. "Forecasting Binary Outcomes," Discussion Papers 12-09, University at Albany, SUNY, Department of Economics.
  2. Blaskowitz, Oliver & Herwartz, Helmut, 2014. "Testing the value of directional forecasts in the presence of serial correlation," International Journal of Forecasting, Elsevier, vol. 30(1), pages 30-42.
  3. Oliver Blaskowitz & Helmut Herwartz, 2008. "Testing directional forecast value in the presence of serial correlation," SFB 649 Discussion Papers SFB649DP2008-073, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Gradojevic, Nikola, 2007. "The microstructure of the Canada/U.S. dollar exchange rate: A robustness test," Economics Letters, Elsevier, vol. 94(3), pages 426-432, March.
  5. Emekter, Riza & Jirasakuldech, Benjamas & Snaith, Sean M., 2009. "Nonlinear dynamics in foreign exchange excess returns: Tests of asymmetry," Journal of Multinational Financial Management, Elsevier, vol. 19(3), pages 179-192, July.
  6. Angela He & Alan Wan, 2009. "Predicting daily highs and lows of exchange rates: a cointegration analysis," Journal of Applied Statistics, Taylor & Francis Journals, vol. 36(11), pages 1191-1204.
  7. Gradojevic, Nikola, 2007. "Non-linear, hybrid exchange rate modeling and trading profitability in the foreign exchange market," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 557-574, February.

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