Speculative strategies in the foreign exchange market based on genetic programming predictions

Marcos Alvarez Diaz

Applied Financial Economics, 2010, vol. 20, issue 6, 465-476

Abstract: In this article, we investigate the out-of-sample forecasting ability of a Genetic Program (GP) to approach the dynamic evolution of the yen/US dollar and British pound/US dollar exchange rates, and verify whether the method can beat the random walk model. Later on, we use the predicted values to generate a trading rule and we check the possibility of obtaining extraordinary profits in the foreign exchange market. Our results reveal a slight forecasting ability for one-period-ahead, which is lost when more periods ahead are considered. On the other hand, our trading strategy obtains above-normal profits. However, when transaction costs are incorporated, the profits practically disappear or become negative.

Date: 2010
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DOI: 10.1080/09603100903459782

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