Modelling and trading the EUR/USD exchange rate at the ECB fixing

Christian Dunis, Jason Laws and Georgios Sermpinis

The European Journal of Finance, 2010, vol. 16, issue 6, 541-560

Abstract: The motivation for this paper is to investigate the use of alternative novel neural network (NN) architectures when applied to the task of forecasting and trading the euro/dollar (EUR/USD) exchange rate, using the European Central Bank (ECB) fixing series with only auto-regressive terms as inputs. This is done by benchmarking four different NN designs representing a higher-order neural network (HONN), a Psi Sigma Network and a recurrent neural network with the classic multilayer perception (MLP) and some traditional techniques, either statistical such as an auto-regressive moving average model, or technical such as a moving average convergence/divergence model, plus a naive strategy. More specifically, the trading performance of all models is investigated in a forecast and trading simulation on the EUR/USD ECB fixing time series over the period 1999-2007 using the last one and half years for out-of-sample testing, an original feature of this paper. We use the EUR/USD daily fixing by the ECB as many financial institutions are ready to trade at this level and it is therefore possible to leave orders with a bank for business to be transacted on that basis. As it turns out, the MLP does remarkably well and outperforms all other models in a simple trading simulation exercise. However, when more sophisticated trading strategies using confirmation filters and leverage are applied, the HONN network produces better results and outperforms all other NN and traditional statistical models in terms of annualized return.

Keywords: confirmation filters; higher-order neural networks; Psi Sigma networks; recurrent neural networks; leverage; multi-layer perception networks; quantitative trading strategies (search for similar items in EconPapers)
Date: 2010
References: View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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DOI: 10.1080/13518470903037771

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