Model-free evaluation of directional predictability in foreign exchange markets, страница 18

Likewise, M_ZID1,2 indicates that, except for JY and FJY, the direction of individual currency returns is predictable using past volatility of interest rate differentials. However, the evidence is not strong and the overall statistical significance is much weaker than that for the M_ZY1,2 test—we have seen that the past volatility of the returns is most helpful in predicting the direction of future returns. Taken together, these findings suggest that the smooth and symmetric nature of the volatility of interest rate differentials may result in weaker impact on directional predictability than the volatility of individual currency returns.

Finally, M_ZID1,3 and M_ZID1,4 show limited evidence of directional predictability from skewness and kurtosis of past interest rate differentials. In fact, there are many cases where neither skewness nor kurtosis of past interest rate differentials is useful in predicting the direction of individual currency returns (e.g., AD in both spot and futures markets). On the other hand, M_ZZID1,0 shows strong evidence that the direction of past interest rate differentials can be used to predict the direction of future individual currency returns. When compared to M_ZZ1,0,

Table III. GCS test statistics for changes in single currency spot and futures (pD 21): using interest rate differentials