Kearney, Fearghal ORCID: 0000-0002-3251-8707, Cummins, Mark ORCID: 0000-0002-3539-8843 and Murphy, Finbarr ORCID: 0000-0002-7463-7923 (2019) Using extracted forward rate term structure information to forecast foreign exchange rates. Journal of Empirical Finance, 53 . pp. 1-14. ISSN 0927-5398
Abstract
The difficulty of beating the random walk in forecasting spot foreign exchange rates is well documented.
In this paper, we propose a functional principal component-based scalar response model which we benchmark versus leading VECM frameworks. Our approach leads to near systematic outperformance in terms
of a comparison of performance measures, and to multiple instances of statistically significant improvements in forecast accuracy. Overall, our results provide evidence that the forward rate term structure
contains substantial information about the evolution of the spot exchange rate. Finally, a stylised trading
strategy is employed to demonstrate the potential economic benefits of our approach.
Metadata
Item Type: | Article (Published) |
---|---|
Refereed: | Yes |
Uncontrolled Keywords: | foreign exchange; forward rate term structure modelling; functional data analysis; multiple hypothesis testing |
Subjects: | Business > Finance |
DCU Faculties and Centres: | DCU Faculties and Schools > DCU Business School |
Publisher: | Elsevier |
Official URL: | http://dx.doi.org/10.1016/j.jempfin.2019.05.002 |
Copyright Information: | © 2020 Elsevier |
Use License: | This item is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 3.0 License. View License |
ID Code: | 24045 |
Deposited On: | 10 Jan 2020 13:58 by Thomas Murtagh . Last Modified 02 May 2022 03:30 |
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