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An error-correction model for forecasting changes in foreign currency futures spreads

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  • Stephen Wilcox
  • John Geppert

Abstract

The foreign currency futures pricing model of Amin and Jarrow (1991) is used to develop a model that predicts the primary determinants of foreign currency futures spreads. Our data set consists of daily observations of futures prices, spot exchange rates, and Eurocurrency LIBOR for the British pound and Japanese yen from January 2, 1990 to December 31, 2004. Using a 5-year moving window methodology, we find repeated evidence of cointegration between the futures spread, spot exchange rates, and interest rates over ten different estimation periods. An errorcorrection model is used to develop a trading strategy that generates significant out-of-sample profits. Copyright Springer 2007

Suggested Citation

  • Stephen Wilcox & John Geppert, 2007. "An error-correction model for forecasting changes in foreign currency futures spreads," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 122-142, March.
    • Handle: RePEc:spr:jecfin:v:31:y:2007:i:1:p:122-142
    DOI: 10.1007/BF02751517
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