Two-Period-Ahead Forecasting for Investment Management in the Foreign Exchange

Konstantins KOZLOVSKIS, Natalja LACE, Julija BISTROVA, Jelena TITKO


Modern trading platforms with built-in programming languages and application of programming interfaces allow implementation of econometric methods in financial instruments trading. Offline testing of the developed strategies gives an opportunity to estimate the efficiency of investment management based on such trading technology.

Autoregressive models ensure sufficient approximation of the financial time series. The main idea of the paper is to check the possibility of using two-period-ahead forecasting in trading on foreign exchange taking into account some limitations described in the paper. Using this feature of autoregressive models the efficiency of two-period-ahead forecasting is evaluated in this paper as a part of the simplest trading strategy on foreign exchange. The trading strategy is based on opening the position on daily average prices predicted by one-period-ahead forecasting and closing the position on take profit level predicted by two-period-ahead forecasting.

The advantages and disadvantages of two-period-ahead forecasting implementation in investment management are discovered when testing the trading strategy on foreign exchange. After estimation of the trading statistics some optimizations are made in the initial trading strategy.

Full Paper in PDF Document


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