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    Can exchange rate models outperform the random walk? Magnitude, direction and profitability as criteria

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    Authors
    Moosa, I.
    Burns, Kelly
    Date
    2015
    Type
    Journal Article
    
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    Citation
    Moosa, I. and Burns, K. 2015. Can exchange rate models outperform the random walk? Magnitude, direction and profitability as criteria. Economia Internazionale / International Economics. 65 (3): pp. 473-490.
    Source Title
    Economia Internazionale
    ISSN
    0012-981X
    School
    Curtin Graduate School of Business
    URI
    http://hdl.handle.net/20.500.11937/30822
    Collection
    • Curtin Research Publications
    Abstract

    While many explanations have been put forward for the failure of exchange rate models to outperform the random walk in out-of-sample forecasting, a simple explanation is the use of measures of forecasting accuracy that depend entirely on the magnitude of the forecasting error. By using simulated data representing the forecasts of eight models, it is demonstrated that the random walk can be outperformed if forecasting power is judged by measures of direction accuracy, by adjusting the root mean square error to take into account direction accuracy, and by using the risk-adjusted return obtained from a trading strategy based on the forecasts.

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