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.
Sample Solution
