Ec409 Exchange Rate Forecasting SUGGESTED CAPSTONE PROJECTS Project 1.
The project consists on using theories learned in class to design forecast strategies using fundamentals to make forecasts of currencies over the next few months. Then use statistical tests to compare these forecasts with alternative forecasts and strategies. Big Data may be used to forecast fundamentals.
a. Choose currencies, with N > 2.
b. Design a forecasting strategy for the relevant determinants of your exchange rates, like interest
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rates, GDP growth, industrial production, unemployment, inflation, terms of trade, etc.
c. Based on your interest rate differential forecasts above, generate out-of-sample forecasts for each
of your exchange rates: 1-month, 3-month, 6 month, 9 month and 12 months ahead.
d. Illustrate graphically your strategy in (b) and (c).
e. Perform Binomial test of your directional forecasts
f. Perform Diebold-Mariano and Clark-West tests of your point forecasts
g. Convert your forecasts into a trading strategy and compute the
h. Compute the degree of Robustness of your strategy against wort-case scenarios
i. Compare the profitability of your to that of: Forex and Macro based Hedge Funds; the SP500.
Project 2.
Based on the models learned in class, develop a “carry-trade” strategy and follow the same steps as in Project 1.
OPTIONAL READING LIST
Froot, . and . 1995. “Perspectives on PPP and Long-Run Real Exchange Rates.” Handbook of International Economics Vol 3 Chapter 32
Engel, Charles. 2014. “Exchange Rates and Interest Parity.” Handbook of International Economics Vol 4 Chapter 8
Taylor, . 1993. “Discretion versus Policy Rules in Practice.” Carnegie-Rochester Conf. Ser. Public Policy 39: 195–214.
Molodtsova, Tanya and . Papell. 2009. “Out-of-Sample Exchange Rate Predictability with Fundamentals.” Journal of International Economics 77: 167-180.
́lez-Rivera. 2012. “Forecasting for Economics and Business.” Routledge.
Fama, . 1984. “Forward and Spot Exchange Rates.” Journal of Monetary Economics
14(3):319-338.
Gourinchas, Pierre-Olivier and . 2004. “Exchange Rate Puzzles and Distorted
Beliefs.” Journal of International Economics 64(2):303-333.
Eichenbaum, Martin and . Evans. 1995. “Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates.” Quarterly Journal of Economics 110:975–1009.
Burnside, Craig, , and . 2006. “The Returns to Currency Speculation.” NBER Working Paper No. 12489.
Burnside, Craig, and . 2011. “Carry Trade and Momentum in Currency Markets.” NBER Working Paper No. 16942.
Li, Ming and . 2015. “Exchange Rates Under Robustness: An Account of the Forward Premium Puzzle.” Working Paper
. 2016. “Forward Premium Puzzle and Robust Control.” Working Paper
Kim, Young Ju, and . 2014. “Speculators Positions and Exchange Rate
Forecasts: Beating Random Walk Models.” Working Paper
Hull, . 2014. “Options, Futures, and Other Derivatives.” Pearson.
Bekaert, Geert J. and . Hodrick. 2011. “International Financial Management.” Pearson.
Pesaran, M. Hashem and . 1992. “A Simple Nonparametric Test of Predictive
Performance.” Journal of Business and Economic Statistics 10(4): 461-465.
Diebold, . and . Mariano. 1995. “Comparing Predictive Accuracy.” Journal of
Business and Economic Statistics 13(3):253-263.
Clark, . and West, . 2006. “Using Out-of-Sample Mean Squared Prediction Errors
to Test the Martingale Difference Hypothesis,” Journal of Econometrics 135(1-2):155-186.
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