Directional accuracy, forecasting error and the profitability of currency trading: Model-based evidence

Imad Ahmed Moosa, John Jude Vaz

    Research output: Contribution to journalArticleResearchpeer-review

    2 Citations (Scopus)

    Abstract

    Three models (the flexible-price monetary model, PPP and a univariate ARIMA model) are estimated for 45 currency pairs to find out if the profitability of forecasting-based currency trading is more related to the ability of the underlying model to predict the direction of change than the magnitude of the forecasting error. Theoretical considerations show that a correct prediction of the direction of change is neither a necessary nor a sufficient condition for a profitable trade. The results of the exercise indicate that profitability is more strongly correlated with directional accuracy than with the magnitude of the error.
    Original languageEnglish
    Pages (from-to)6191 - 6199
    Number of pages9
    JournalApplied Economics
    Volume47
    Issue number57
    DOIs
    Publication statusPublished - 2015

    Cite this

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    abstract = "Three models (the flexible-price monetary model, PPP and a univariate ARIMA model) are estimated for 45 currency pairs to find out if the profitability of forecasting-based currency trading is more related to the ability of the underlying model to predict the direction of change than the magnitude of the forecasting error. Theoretical considerations show that a correct prediction of the direction of change is neither a necessary nor a sufficient condition for a profitable trade. The results of the exercise indicate that profitability is more strongly correlated with directional accuracy than with the magnitude of the error.",
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    Directional accuracy, forecasting error and the profitability of currency trading: Model-based evidence. / Moosa, Imad Ahmed; Vaz, John Jude.

    In: Applied Economics, Vol. 47, No. 57, 2015, p. 6191 - 6199.

    Research output: Contribution to journalArticleResearchpeer-review

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    AU - Vaz, John Jude

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    AB - Three models (the flexible-price monetary model, PPP and a univariate ARIMA model) are estimated for 45 currency pairs to find out if the profitability of forecasting-based currency trading is more related to the ability of the underlying model to predict the direction of change than the magnitude of the forecasting error. Theoretical considerations show that a correct prediction of the direction of change is neither a necessary nor a sufficient condition for a profitable trade. The results of the exercise indicate that profitability is more strongly correlated with directional accuracy than with the magnitude of the error.

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