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Directional forecasting in financial time series using support vector machines: The USD/Euro exchange rate

Author

Listed:
  • Plakandaras, Vasilios

    () (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Papadimitriou, Theophilos

    () (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Gogas, Periklis

    () (Democritus University of Thrace, Department of International Economic Relations and Development)

Abstract

In this paper, we present a novel machine learning based forecasting system of the EU/USD exchange rate directional changes. Specifically, we feed an overcomplete variable set to a Support Vector Machines (SVM) model and refine it through a Sensitivity Analysis process. The dataset spans from 1/1/1999 to 30/11/2011; the data of the last 7 months are reserved for out-of-sample testing. Results show that the proposed scheme outperforms various other machine learning methods treating similar scenarios.

Suggested Citation

  • Plakandaras, Vasilios & Papadimitriou, Theophilos & Gogas, Periklis, 2012. "Directional forecasting in financial time series using support vector machines: The USD/Euro exchange rate," DUTH Research Papers in Economics 5-2012, Democritus University of Thrace, Department of Economics.
  • Handle: RePEc:ris:duthrp:2012_005
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    File URL: http://utopia.duth.gr/~pgkogkas/duthwp/5-2012.pdf
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    References listed on IDEAS

    as
    1. MacDonald, Ronald & Nagayasu, Jun, 1998. "On the Japanese Yen-U.S. Dollar Exchange Rate: A Structural Econometric Model Based on Real Interest Differentials," Journal of the Japanese and International Economies, Elsevier, vol. 12(1), pages 75-102, March.
    2. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
    3. repec:wsi:ijitdm:v:03:y:2004:i:01:n:s0219622004000969 is not listed on IDEAS
    4. De Grauwe, Paul & Grimaldi, Marianna, 2006. "Exchange rate puzzles: A tale of switching attractors," European Economic Review, Elsevier, vol. 50(1), pages 1-33, January.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    7. Shiyi Chen & Wolfgang K. Härdle & Kiho Jeong, 2010. "Forecasting volatility with support vector machine-based GARCH model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(4), pages 406-433.
    8. Lance Taylor, 2004. "Exchange rate indeterminacy in portfolio balance, Mundell--Fleming and uncovered interest rate parity models," Cambridge Journal of Economics, Oxford University Press, vol. 28(2), pages 205-227, March.
    9. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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    Cited by:

    1. Ioannis Praggidis & Periklis Gogas & Vasilios Plakandaras & Theophilos Papadimitriou, 2013. "Fiscal shocks and asymmetric effects: a comparative analysis," Papers 1312.2693, arXiv.org.
    2. Christina Christou & Rangan Gupta & Christis Hassapis & Tahir Suleman, 2017. "The Role of Economic Uncertainty in Forecasting Exchange Rate Returns and Realized Volatility: Evidence from Quantile Predictive Regressions," Working Papers 201774, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Machine Learning; Support Vector Machines; Exchange Rates; Forecasting;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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