| The existence of non-linear deterministic structures in the dynamics of exchange rates has already been amply demonstrated in the literature. With my research, I try to explain if we can exploit these non-linear structures in order to improve our predictive ability and, secondly, if we can use these predictions to generate profitable strategies in the Foreign Exchange Market. To this purpose, I employ different nonparametric forecasting methods such as Nearest Neighbors, Genetic Programming, Artificial Neural Networks, Data-Fusion or an Evolutionary Neural Network. My analysis will be center on the specific case of the Yen/US{dollar} and Pound Sterling/US{dollar} exchange rates and it considers both point predictions and the anticipating of either depreciations or appreciations. My results reveal a slight forecasting ability for one-period-ahead which is lost when more periods ahead are considered, and my trading strategy obtains above-normal profits. However, when transaction costs are incorporated, the profits practically disappear or become negative. |
