An Artificial Neural Network Model to Forecast Exchange Rates

ABSTRACT

For the purposes of this research, the optimal MLP neural network topology has been designed and tested by means the specific genetic algorithm multi-objective Pareto-Based. The objective of the research is to predict the trend of the ex-change rate Euro/USD up to three days ahead of last data available. The variable of output of the ANN designed is then the daily exchange rate Euro/Dollar and the frequency of data collection of variables of input and the output is daily. By the analysis of the data it is possible to conclude that the ANN model developed can largely predict the trend to three days of exchange rate Euro/USD.

For the purposes of this research, the optimal MLP neural network topology has been designed and tested by means the specific genetic algorithm multi-objective Pareto-Based. The objective of the research is to predict the trend of the ex-change rate Euro/USD up to three days ahead of last data available. The variable of output of the ANN designed is then the daily exchange rate Euro/Dollar and the frequency of data collection of variables of input and the output is daily. By the analysis of the data it is possible to conclude that the ANN model developed can largely predict the trend to three days of exchange rate Euro/USD.

Cite this paper

nullV. Pacelli, V. Bevilacqua and M. Azzollini, "An Artificial Neural Network Model to Forecast Exchange Rates,"*Journal of Intelligent Learning Systems and Applications*, Vol. 3 No. 2, 2011, pp. 57-69. doi: 10.4236/jilsa.2011.32008.

nullV. Pacelli, V. Bevilacqua and M. Azzollini, "An Artificial Neural Network Model to Forecast Exchange Rates,"

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[23] J. A. Frankel, “Monetary and Portfolio Balance Models of the Determination of Exchange Rates,” In: J. A. Frankel, Ed., On Exchange Rates, MIT Press, Cambridge, 1993, pp. 95-116.

[24] W. H. Branson, H. Haltunnen and P. Mason, “Exchange Rates in the Short-Run: The Dollar-Deutsche Mark Rate,” European Economic Review, Vol. 10, No. 3, 1977, pp. 303- 324. doi:10.1016/S0014-2921(77)80002-0

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[26] R. Meese and K. Rogoff, “Empirical Exchange Rate Models of the Seventies: How Well Do They Fit out of Sample?” Journal of International Economics, Vol. 14, No. 1-2, 1983, pp. 3-24. doi:10.1016/0022-1996(83)90017-X

[27] D. A. Hsieh, “Testing for Nonlinear Dependence in Daily Foreign Exchange Rates,” Journal of Business, Vol. 62, No. 3, 1989, pp. 329-368.

[28] J. C. Vasillicos, A. Demos and F. Tata, “No Evidence of Chaos but Some Evidence of Multifractals in the Foreign Exchange and Stock Markets,” In: A. J. Crilly, R. A. Earnshaw, H. Jomes, Eds., Application of Fractals and Chaos, Springer-Verlag, Berlin, 1992, pp. 249-265.

[29] F. Leroy and C. Nottola, “Searching for Relevant Fuzzy Patterns in Financial Time Series with Genetic Algorithms with Application to USD/FF Exchange Rates,” Working Paper, 1993.

[30] A. P. Refenes, K. Azema-Barac, L. Chen and S. A. Karoussos, “Currency Exchange Rate Prediction and Neural Network Design Strategies,” Neural Computing & Applications, Vol. 1, No. 1, 1993, pp. 46-58. doi:10.1007/BF01411374

[31] I. Nabney, C. Dunis, R. Dallaway, S. Leong and W. Redshaw, “Leading Edge Forecasting Techniques for Exchange Rate Prediction,” Financial Economics, Working Papers, Chemical Bank, London, No. 3, 1994.

[32] I. Nabney, C. Dunis, R. Dallaway, S. Leong and W. Redshaw, “Leading Edge Forecasting Techniques for Exchange Rate Prediction,” In: C. Dunis, Ed., Forecasting Financial Markets: Exchange Rates, Interest Rates and Asset Management, John Wiley & Sons, Chichester, 1996, pp. 227-244.

[33] C. Brooks, “Testing for Nonlinearity in Daily Pound Exchange Rates,” Applied Financial Economics, Vol. 6, No. 4, 1996, pp. 307-317. doi:10.1080/096031096334105

[34] P. Tenti, “Forecasting Foreign Exchange Rates Using Recurrent Neural Networks,” Applied Artificial Intelligence, Vol. 10, 1996, pp. 567-581. doi:10.1080/088395196118434

[35] D. R. Dersch, B. G. Flower and S. J. Pickard, “Exchange Rate Trading Using a Fast Retraining Procedure for Generalised Radial Basis Function Networks,” Proceedings of 3rd International Conference on Neural Networks in the Capital Markets, London, 11-13 October 1997.

[36] S. Lawrence, C. L. Giles and A. C. Tsoi, “Symbolic Con- version, Grammatical Inference and Rule Extraction for Foreign Exchange Rate Prediction,” In: A. S. Weigend, Y. Abu-Mustafa, A. P. N. Refens, Eds., Decision Technologies for Financial Engineering, World Scientific, Singapore, 1997.

[37] F. A. Rauscher, “Multi Task in a Neural VEC Approach for Exchange Rate Forecasting,” Proceedings of 3rd International Conference on Neural Networks in the Capital Markets, London, 11-13 October 1997.

[38] M. R. El Shazly and H. E. El Shazly, “Comparing the Forecasting Performance of Neural Networks and Forward Exchange Rates,” Journal of Multinational Financial Management, Vol. 7, No. 4, 1997, pp. 345-356. doi:10.1016/S1042-444X(97)00018-2

[39] G. Gabbi, “La Previsione Nei Mercati Finanziari: Trading System, Modelli Econometrici e Reti Neurali,” Bancaria Editrice, Roma, 1999.

[40] R. Gencay, “Linear, Non-Linear and Essential Foreign Exchange Rate Prediction with Simple Technical Trading Rules,” Journal of International Economics, Vol. 47, No. 1, 1999, pp. 91-107. doi:10.1016/S0022-1996(98)00017-8

[41] A. S. Soofi and L. Cao, “Nonlinear Deterministic Forecasting of Daily Peseta-Dollar Exchange Rate,” Economic Letters, Vol. 62, No. 2, 1999, pp. 175-180. doi:10.1016/S0165-1765(98)00134-7

[42] L. Sarno, “Nonlinear Exchange Rate Models: A Selective Overview,” IMF Working Paper, International Monetary Fund Publications, Washington DC, 2003.

[43] M. Alvarez-D?az and A. Alvarez, “Forecasting Exchange Rates Using Genetic Algorithms,” Applied Economics Letters, Vol. 10, No. 6, 2003, pp. 319-322.

[44] M. Alvarez-D?az and A. Alvarez, “Genetic Multimodel Composite Forecast for Non-Linear Forecasting of Exchange Rates,” Empirical Economics, Vol. 30, No. 3, 2005, pp. 643-663.

[45] M. Alvarez-D?az and A. Alvarez, “Forecasting Exchange Rates Using an Evolutionary Neural Network,” Applied Financial Economics Letters, Vol. 3, No. 1, 2007, pp. 5-9.

[46] M. Alvarez-Diaz, “Exchange Rates Forecasting: Local or Global Method?” Applied Financial Economics Letters, Vol. 40, No. 15, 2008, pp. 1969-1984.

[47] S. Reitz and M. Taylor, “The Coordination Channel of Foreign Exchange Intervention: A Nonlinear Microstruc- tural Analysis,” European Economic Review, Vol. 52, No. 1, January 2008, pp. 55-76. doi:10.1016/j.euroecorev.2007.06.023

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