A Trading Approach to Testing for Predictability

Anatolyev, Stanislav; Gerko, Alexander

doi:10.1198/073500104000000640

Cited by 62 publications

(82 citation statements)

References 14 publications

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“…To achieve a more realistic evaluation of the usefulness of forecasts of market variables for investors, several studies have suggested the use of the profitability of trading rules as a natural performance measure (e.g. Leitch and Tanner, 1991;Anatolyev and Gerko, 2005;Jordà and Taylor, 2011). Secondly, this approach avoids the loss of information by a categorization of continuous realizations of exchange rate movements into an appreciate, a constant and a depreciate range.…”

Section: Forecasting Performancementioning

confidence: 99%

“…For the measurement of FX forecasting performance, we follow several authors who have argued that forecasts about marketable assets should be evaluated from an investor's perspective by a zero net investment trading rule (Leitch and Tanner, 1991;Anatolyev and Gerko, 2005;Jordà and Taylor, 2011). Accordingly, we translate the qualitative forecasts of respondents into a long/short position, i.e., we translate an appreciation expectation into a buy (including the interest rate differential) etc., as suggested, for example, by Elliot and Ito (1999).…”

Section: Introductionmentioning

confidence: 99%

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Individual Exchange Rate Forecasts and Expected Fundamentals

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11062.pdf Non-technical SummaryExchange rates are one of the most important prices in open economies. Despite their great importance for many enterprises, surprisingly little is known about the economic factors influencing the ups and downs of exchange rates at intermediate horizons. Although several theoretical macroeconomic models do identify potential determinants of exchange rates, empirical studies since the mid-1980s have found that these models do not make more accurate medium-term forecasts than random forecasts. This empirical finding has led to the conclusion that exchange rates and fundamentals are unrelated in the medium term. However, the complexity of currency markets (with heterogeneous market participants or time-variant influencing factors) could conceal a potential relation between economic fundamentals and exchange rates.The present study takes an indirect approach to investigating whether exchange rates are formed based on fundamentals. The defining idea behind our study is to analyze individual forecasts without making assumptions regarding the forecaster's macroeconomic models. Instead, we judge individual forecasts by their forecast ability only. We assume that good exchange rate forecasts are generally based on better information, and analyze whether this information is macroeconomic. To this end, we take a look at the forecast ability of individual forecasts for the USD/EUR exchange rate in conjunction with the forecast ability of associated short-term interest rate forecasts.We view the significant, positive relationship between good exchange rate forecasts (on a one-month horizon) and good interest rate forecast as evidence that exchange rate forecasts benefit from a better interpretation of the macroeconomic reality. This requires a fundamental linkage between exchange rates and macroeconomic variables.If this linkage exists, it should vary in its importance across different market phases. Our further analyses indeed indicate that a correlation between exchange rates and interest rates is especially important when there is an obvious fundamental misalignment between the respective countries. This is the case when there is a great difference between exchange rates and their fundamental values (based on purchasing power parity), when interest rate differences between the two currencies are large, and when exchange rates do not exhibit a strong tren...

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Section: Forecasting Performancementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Individual Exchange Rate Forecasts and Expected Fundamentals

2011

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“…We test the economic value of a strategy using Anatolyev-Gerko statistic (Anatolyev and Gerko 2005). This test compares the profitability of a trading strategy relative to the random walk model.…”

Section: Testing Proceduresmentioning

confidence: 99%

The Information Content of a Limit Order Book: The Case of an FX Market

Kozhan

Salmon

2010

SSRN Journal

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In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data. JEL classification: D81, F31, C53Keywords: profitability, limit order book, high-frequency data, algorithmic trading $ We are grateful to an anonymous referee and Bruce Lehmann (the editor), whose insightful comments greatly improved the paper. We also thank Martin Evans, Matthijs Fleischer, Thierry Foucault, Lawrence Harris, Rich Lyons, Chris Neely, Carol Osler, Richard Payne, Dagfinn Rime, Lucio Sarno, Nick Webber and Paul Weller for their helpful comments and suggestions. We remain responsible for all errors.

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“…There has been quite a bit of research which develops tools for testing for sign predictability and evaluation of directional forecasts (Henriksson and Merton, 1981;Breen, Glosten and Jagannathan, 1989;Pesaran and Timmermann 1992;Anatolyev and Gerko 2005;Christo¤ersen and Diebold, 2006;Chung and Hong, 2007). Applications may be found in Hartzmark (1991), Greer (2003) and Bekiros and Georgoutsos (2008), among many others.…”

Section: Introductionmentioning

confidence: 99%

Multi-Market Direction-of-Change Modeling Using Dependence Ratios

Anatolyev¹

2009

Studies in Nonlinear Dynamics &Amp; Econometrics

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We consider a multivariate dynamic model for the joint distribution of binary outcomes associated with directions-of-change for several markets or assets. The marginal distribution of each binary outcome follows a dynamic binary choice model, while the association structure is parameterized via possibly time varying dependence ratios. We illustrate the technique using daily stock index returns from three European markets, from three Baltic markets, and from two Chinese exchanges.

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A Trading Approach to Testing for Predictability

Cited by 62 publications

References 14 publications

Individual Exchange Rate Forecasts and Expected Fundamentals

Individual Exchange Rate Forecasts and Expected Fundamentals

The Information Content of a Limit Order Book: The Case of an FX Market

Multi-Market Direction-of-Change Modeling Using Dependence Ratios

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