An error-correction model for forecasting changes in foreign currency futures spreads |
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Authors: | Stephen E Wilcox John M Geppert |
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Institution: | 1.University of Nebraska-Lincoln,Lincoln |
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Abstract: | The foreign currency futures pricing model of Amin and Jarrow (1991) is used to develop a model that predicts the primary
determinants of foreign currency futures spreads. Our data set consists of daily observations of futures prices, spot exchange
rates, and Eurocurrency LIBOR for the British pound and Japanese yen from January 2, 1990 to December 31, 2004. Using a 5-year
moving window methodology, we find repeated evidence of cointegration between the futures spread, spot exchange rates, and
interest rates over ten different estimation periods. An errorcorrection model is used to develop a trading strategy that
generates significant out-of-sample profits. |
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Keywords: | |
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