Title: A note on forecasting exchange rates using a cluster technique

Authors: Marcos Alvarez-Diaz

Addresses: Department of Applied Economics, University of Balearic Islands, Cra. de Valdemossa, Km. 7.5, 07112, Palma de Mallorca, Spain

Abstract: In this note, we propose a cluster method as a simple predictive tool to forecast exchange rates (specifically the Japanese Yen and the British Pound against the US Dollar). The general goal in this study is two-fold. First of all, we verify whether or not we can accurately predict the exchange rate movements using the suggested method. Secondly, we use the generated sign predictions to build a simple trading strategy and check if we can obtain above-normal profits in the foreign exchange market. Our results reveal a sign forecasting ability for one-period-ahead which is lost when more periods ahead are considered. On the other hand, our simple trading strategy does not obtain above-normal profits.

Keywords: cluster forecasting; exchange rate forecasting; foreign exchange market; trading strategies; exchange rates; Japanese yen; UK pound; US dollar; exchange rate movements.

DOI: 10.1504/IJBFMI.2008.020815

International Journal of Business Forecasting and Marketing Intelligence, 2008 Vol.1 No.1, pp.68 - 81

Published online: 17 Oct 2008 *

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