Improving the 'Correctness' of Foreign Exchange Forecasts Th

Previous attempts at composite foreign exchange forecasting mainly deal with accuracy. However, many international finance scholars argue that the correctness criterion may be more appropriate for measuring short-term hedging decisions. A composite forecasting methodology is suggested that may improve the correctness of foreign exchange forecasts. Under this methodology, the forward rate is included as one of the components for forming the composite forecast. The deviation-minimization criterion is applied to derive the composite weights. Ex post and ex ante tests are conducted to test the methodology. The empirical results lend partial support to the methodology. Furthermore, the composite foreign exchange forecasts obtained may simultaneously satisfy both the accuracy and correctness criteria.