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Forecasting the NOK/USD Exchange Rate with Machine Learning Techniques

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  • Theophilos Papadimitriou

    ()
    (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece)

  • Periklis Gogas

    ()
    (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece)

  • Vasilios Plakandaras

    ()
    (Department of Economics, University Campus Komotini, Democritus University of Thrace, Greece)

Abstract

In this paper, we approximate the empirical findings of Papadamou and Markopoulos (2012) on the NOK/USD exchange rate under a Machine Learning (ML) framework. By applying Support Vector Regression (SVR) on a general monetary exchange rate model and a Dynamic Evolving Neuro-Fuzzy Inference System (DENFIS) to extract model structure, we test for the validity of popular monetary exchange rate models. We reach to mixed results since the coefficient sign of interest rate differential is in favor only with the model proposed by Bilson (1978), while the inflation rate differential coefficient sign is approximated by the model of Frankel (1979). By adopting various inflation expectation estimates, our SVR model fits actual data with a small Mean Absolute Percentage Error when an autoregressive approach excluding energy prices is adopted for inflation expectation. Overall, our empirical findings conclude that for a small open petroleum producing country such as Norway, fundamentals possess significant forecasting ability when used in exchange rate forecasting.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 59_13.

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Date of creation: Nov 2013
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Handle: RePEc:rim:rimwps:59_13

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Keywords: International Financial Markets; Foreign Exchange; Support Vector Regression; Monetary exchange rate models;

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  1. Backus, David K & Gregory, Allan W & Telmer, Chris I, 1993. " Accounting for Forward Rates in Markets for Foreign Currency," Journal of Finance, American Finance Association, vol. 48(5), pages 1887-1908, December.
  2. Q. Farooq Akram, 2004. "Oil prices and exchange rates: Norwegian evidence," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 476-504, December.
  3. Giorgio Valente & Lucio Sarno & Abhay Abhayankar, 2004. "Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability," Working Papers wp04-01, Warwick Business School, Finance Group.
  4. Cheung, Yin-Wong & Chinn, Menzie & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt5fc508pt, Department of Economics, UC Santa Cruz.
  5. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  7. Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2010. "Spot and Forward Volatility in Foreign Exchange," CEPR Discussion Papers 7893, C.E.P.R. Discussion Papers.
  8. Stephanos Papadamou & Thomas Markopoulos, 2012. "The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone," International Advances in Economic Research, Springer, vol. 18(3), pages 299-314, August.
  9. Lee Chin & M. Azali & K. G. Matthews, 2007. "The monetary approach to exchange rate determination for Malaysia," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(2), pages 91-94.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  11. Cushman, David O., 2007. "A portfolio balance approach to the Canadian-U.S. exchange rate," Review of Financial Economics, Elsevier, vol. 16(3), pages 305-320.
  12. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  13. Lee Chin & M. Azali & Zulkornain Yusop & Mohammed Yusoff, 2007. "The monetary model of exchange rate: evidence from The Philippines," Applied Economics Letters, Taylor & Francis Journals, vol. 14(13), pages 993-997.
  14. Tatsuyoshi Miyakoshi, 2000. "The monetary approach to the exchange rate: empirical observations from Korea," Applied Economics Letters, Taylor & Francis Journals, vol. 7(12), pages 791-794.
  15. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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