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Econometrics 2016, 4(1), 15;

Timing Foreign Exchange Markets

Moody’s Analytics, 121 N Walnut St., West Chester, PA 19380, USA
Booth School of Business, The University of Chicago, 5807 S, Woodlawn Ave, Chicago, IL 60637, USA
Colegio de Estudios Superiores de Administración, Bogotá, Colombia and Instituto de Estudios Superiores de Administración, Caracas 1010, Venezuela
Author to whom correspondence should be addressed.
Academic Editors: Herman K. van Dijk, Francesco Ravazzolo, Nalan Basturk and Roberto Casarin
Received: 2 July 2015 / Revised: 14 December 2015 / Accepted: 28 January 2016 / Published: 11 March 2016
(This article belongs to the Special Issue Computational Complexity in Bayesian Econometric Analysis)
Full-Text   |   PDF [337 KB, uploaded 11 March 2016]


To improve short-horizon exchange rate forecasts, we employ foreign exchange market risk factors as fundamentals, and Bayesian treed Gaussian process (BTGP) models to handle non-linear, time-varying relationships between these fundamentals and exchange rates. Forecasts from the BTGP model conditional on the carry and dollar factors dominate random walk forecasts on accuracy and economic criteria in the Meese-Rogoff setting. Superior market timing ability for large moves, more than directional accuracy, drives the BTGP’s success. We explain how, through a model averaging Monte Carlo scheme, the BTGP is able to simultaneously exploit smoothness and rough breaks in between-variable dynamics. Either feature in isolation is unable to consistently outperform benchmarks throughout the full span of time in our forecasting exercises. Trading strategies based on ex ante BTGP forecasts deliver the highest out-of-sample risk-adjusted returns for the median currency, as well as for both predictable, traded risk factors. View Full-Text
Keywords: foreign exchange; speculation; Bayesian treed Gaussian process; Anatolyev-Gerko statistic; Giacomini-White statistic foreign exchange; speculation; Bayesian treed Gaussian process; Anatolyev-Gerko statistic; Giacomini-White statistic
JEL: F31; G15; G17
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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Malone, S.W.; Gramacy, R.B.; ter Horst, E. Timing Foreign Exchange Markets. Econometrics 2016, 4, 15.

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