Can markov switching models predict excess foreign exchange returns?
By: Michael J. Dueker and Christopher J. Neely.
Contributors: Neely, Christopher J.; Federal Reserve Bank of St. Louis.
Series: Working paper ;; 2001-021D; Working paper (Federal Reserve Bank of St. Louis : Online) ;; 2001-021D.
Publisher: Federal Reserve Bank of St. Louis
Published: 2001
Place of publication: [St. Louis, Mo.]
Language: eng
Format: Electronic resource
Subjects: Foreign exchange rates -- Forecasting -- Econometric models.; Markov processes.
Description: "This paper merges the literature on high-frequency technical trading rules with the literature on Markov switching at low frequencies to develop economically useful trading rules.  The Markov switching models produce out-of-sample excess returns that exceed those of standard technical trading rules and are fairly stable over time.  The model's intrinsic density forecast enables a value-at-risk adjustment to minimize the periods of poor performance.  The Markov rules' high excess returns contrast with their mixed performance on statistical tests of forecast accuracy.  The investigation fails to identify a clear macroeconomic source for the apparently exploitable trends, although it does highlight the importance of conditioning trading rules on higher moments of the exchange rate distribution"--Federal Reserve Bank of St. Louis web site.
Notes: Includes bibliographical references.
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