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EXCHANGE RATE FORECASTING WITH MODIFIED MICROSTRUCTURE APPROACH MODEL
Abstract
The purpose of the article is to assess the exchange rate forecasting possibilities with a modified microstructure approach model. In this research, the main model's element order flow is represented by dealer clients' long/short positioning ratio. A regression analysis is done to distinguish whether it is possible to forecast the exchange rates with clients' long/short positioning ratio. Then three investment strategies are composed to compare the effectiveness of the forecasts. A conclusion is made that retail traders tend to position against the present exchange rate trend; moreover, as shown by the investment strategy analysis, the trend of the price changes just when the clients give up on their expectations and start to reverse their positions. On the other hand, none of the composed active strategies were able to outperform a simple buy and hold strategy.
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