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Can Macroeconomists Get Rich Forecasting Exchange Rates?

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  • Jesus Crespo Cuaresma

    ()
    (Department of Economics, Vienna University of Economics and Business)

  • Mauro Costantini

    ()
    (Department of Economics and Finance, Brunel University)

  • Jaroslava Hlouskova

    ()
    (Institute for Advanced Studies, Vienna)

Abstract

We provide a systematic comparison of the out-of-sample forecasts based on multivariate macroeconomic models and forecast combinations for the euro against the US dollar, the British pound, the Swiss franc and the Japanese yen. 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 help to improve over benchmark trading strategies for the exchange rate against the US dollar and the British pound, although the excess return per unit of deviation is limited. For the euro against the Swiss franc or the Japanese yen, no evidence of generalized improvement in profit measures over the benchmark is found.

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Paper provided by Vienna University of Economics, Department of Economics in its series Department of Economics Working Papers with number wuwp176.

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Date of creation: Jun 2014
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Handle: RePEc:wiw:wiwwuw:wuwp176

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Keywords: Exchange rate forecasting; forecast combination; multivariate time series models; profitability;

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