Out-of-Sample Exchange Rate Predictability in Emerging Markets: Fundamentals Versus Technical Analysis

Posted: 18 Aug 2018 Last revised: 5 Feb 2021

See all articles by Ibrahim Jamali

Ibrahim Jamali

American University of Beirut

Ehab Abdel-Tawab Yamani

Chicago State University

Date Written: August 5, 2018

Abstract

We provide an in-depth analysis of the predictive ability of models with fundamentals and technical indicators for fourteen emerging market currencies. Our findings suggest that the forecasts from the symmetric Taylor rule as well as from a predictive regression exploiting the informational content of the momentum indicator are statistically superior to those of the random walk and other competing models. We combine the forecasts from the two best performing models via simple techniques and assess the economic significance of the out-of-sample forecasts using a trading strategy based on the sign of the predicted currency returns. Our economic significance results demonstrate that the symmetric Taylor rule, momentum and combination forecasts generate the largest net-of-transactions costs and risk-adjusted returns.

Keywords: Exchange Rate Predictability; Forecasting; Fundamentals; Technical Trading; Emerging Markets Currencies; Currency Returns; Trading Strategy; Portfolios

Suggested Citation

Jamali, Ibrahim and Yamani, Ehab Abdel-Tawab, Out-of-Sample Exchange Rate Predictability in Emerging Markets: Fundamentals Versus Technical Analysis (August 5, 2018). Journal of International Financial Markets, Institutions and Money, 2019, Available at SSRN: https://ssrn.com/abstract=3226418

Ibrahim Jamali

American University of Beirut ( email )

Ehab Abdel-Tawab Yamani (Contact Author)

Chicago State University ( email )

College of Business
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