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This study analizes the forecast ability of the sign variation of the daily exchange in neural networks. The forecast of price's direction is important to effective trade strategies (Leung, Daouk & Chen, 2000). We used backpropagation neural network models: the Multilayer Perceptron, the Jordan-Elman Recurrent network and the Ward network, all with standard and recursive method. To test the forecast ability we use an out-of-sample set of 398 observations and over 337 out-of-sample sub-set of 60 observations. The relative performance of the models was measured by the number of hits of the exchange rate variation sign, using for that the Pesaran & Timmermann's (1992) directional accuracy test. Then, the results of the best neural network model was compared with the ones of AR(1) model and with a buy and hold strategy. The neural network of three layers had the best performance and it forecast ability was significant in statistical and economical terms. When we used a recursive process for re-estimate period to period the weights of the network, we do not find a better performance. In addition, we compare the percentage of sign prediction between ward standard network, ward recursive network and the AR(1) model, and the last was significantly higher. However, the model's forecast capacity did not generate higher significant returns, in relation to a passive investment strategy, even when the abnormal average returns was positive. The results were the expected for the chilean case due to: the few agent that have this market, the high volatility of rate exchange as consequences of international financial crisis, and the significant changes in the market produced by the Central Bank's interventions. [ABSTRACT FROM AUTHOR]

In the Chilean exchange rate market, composed by sophisticated institutional investors and under different models of intervention of Central Bank, it is possible to obtain abnormal returns with the use of technical analysis and autoregresive models. The findings are similar to those observed in other international markets, but they were not the expected by the authors, since the low number of participants in this market, the high volatility due to deep international financial crises and the significant changes in this market introduced by the Central Bank. In effect, in the last third of the sample, the volatility of the exchange rate increased significantly and the abnormal returns obtained under the technical analysis and autoregressive models were equivalent to 60% approximately of the total sample. This period corresponds to the decision of the Chilean Central Bank to intervene in the exchange rate market as a result of the economic crisis in Argentina. Also, we did not observed statistical difference between the exchange rate and the forecasted by the autoregressive models, result that was validated by parametric and nonparametric test. [ABSTRACT FROM AUTHOR]

This paper analyzes the capacity of the neural networks to forecast the sign of weekly variations of IPSA. Several architectures of neural networks were used over the time period between January 11th of 1999 to October 22th of 2001, being the Recursive Ward Network the one with the best performance, reaching an outsample predictive capacity of 72% and an outsample accumulate yield for the IPSA portfolio of a 24.42%. The Recurrent Recursive Jordan & Elman Network achieved a forecast ability of 64% and a return of 21.33%; while the AR(1,1) model obtained a return of 18.31% higher than the Ward Standard Network and Recursive MLP returns. Even though the first one had not statistical evidence of predictive capacity it would allow to conclude that a higher predictive capacity do not always implies higher yields. The Pesaran & Timmermann test (1992) gives evidence that the Recursive Ward Network and the Recurrent Recursive Jordan & Elman Network, in his recursive and standard version can forecast the index directional change for the chilean case. Also, this models could produce higher returns than AR(1,1) model. This result supports the conclusions of Leung, Daouk & Chert (2000) about the prediction of movements directions can give greater capital gains that the forecasting of clove values. [ABSTRACT FROM AUTHOR]