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

Imad Moosa and John Vaz

Applied Economics, 2015, vol. 47, issue 57, 6191-6199

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.

Date: 2015
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DOI: 10.1080/00036846.2015.1068917

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