Design a forecasting strategy for the relevant determinants of your exchange rates

Posted: February 16th, 2022

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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.
Write a detailed paper report about following questions(explain each question and with graphs)
a. Choose currencies, with N > 2.
b. Design a forecasting strategy for the relevant determinants of your exchange rates, like interest
rates, GDP growth, industrial production, unemployment, inflation, terms of trade, etc. Use model like regression（Taylor rules ，VAR )
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 Sharpe Ratio
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.
j.Based on the models learned in class, develop a “carry-trade” strategy
Possible deliverables:
Source code
Screenshots of outputs
Problem analysis
Data schema with explanations
Detailed report
Presentation
OPTIONAL READING LIST
 Froot, Kenneth A. and Kenneth Rogoff. 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, John B. 1993. “Discretion versus Policy Rules in Practice.” Carnegie-Rochester Conf. Ser. Public Policy 39: 195–214.
 Molodtsova, Tanya and David H. Papell. 2009. “Out-of-Sample Exchange Rate Predictability with Taylor Rule Fundamentals.” Journal of International Economics 77: 167-180.
 Gloria González-Rivera. 2012. “Forecasting for Economics and Business.” Routledge.
 Fama, Eugene F. 1984. “Forward and Spot Exchange Rates.” Journal of Monetary Economics
14(3):319-338.
 Gourinchas, Pierre-Olivier and Aaron Tornell. 2004. “Exchange Rate Puzzles and Distorted
Beliefs.” Journal of International Economics 64(2):303-333.

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