ARE FOREIGN EXCHANGE RATES PREDICTABLE? A SURVEY FROM ARTIFICIAL NEURAL NETWORKS PERSPECTIVE *

This study presents a survey on the applications of artificial neural networks (ANNs) in foreign exchange rates forecasting. With their ability to discover patterns in nonlinear systems, ANNs have been widely used as a promising alternative approach to predict foreign exchange rates. In this paper, the predictability of foreign exchange rates is first investigated from neural networks perspective. We examine 45 journal articles about exchange rates prediction with ANNs between 1971 and 2004 in detail, and compare the performances of ANNs and those of other forecasting methods, finding mixed results. Subsequently, the main reasons leading to the inconsistent results are explored by literature analysis and inference. Meanwhile the study summarizes the general situations in which foreign exchange rates are predictable with ANNs in view of previous literature analysis. Finally, some implications and interesting research topics are presented as future research directions in foreign exchange rates forecasting with ANNs.

[1]  Kin Keung Lai,et al.  A novel nonlinear ensemble forecasting model incorporating GLAR and ANN for foreign exchange rates , 2005, Comput. Oper. Res..

[2]  Mona R. El Shazly,et al.  Forecasting currency prices using a genetically evolved neural network architecture , 1999 .

[3]  Ingoo Han,et al.  Optimal signal multi-resolution by genetic algorithms to support artificial neural networks for exchange-rate forecasting , 2000 .

[4]  Thorsten Poddig,et al.  A 'world' model of integrated financial markets using artificial neural networks , 1996, Neurocomputing.

[5]  Kin Keung Lai,et al.  Multistage Neural Network Metalearning with Application to Foreign Exchange Rates Forecasting , 2006, MICAI.

[6]  Kin Keung Lai,et al.  A Novel Adaptive Learning Algorithm for Stock Market Prediction , 2005, ISAAC.

[7]  Philip Hans Franses,et al.  On forecasting exchange rates using neural networks , 1998 .

[8]  James W. Taylor.  A Quantile Regression Neural Network Approach to Estimating the Conditional Density of Multiperiod Returns , 2000 .

[9]  Kin Keung Lai,et al.  Adaptive Smoothing Neural Networks in Foreign Exchange Rate Forecasting , 2005, International Conference on Computational Science.

[10]  J. Gupta,et al.  Neural Networks in Business: Techniques and Applications , 2001 .

[11]  B. L. Kalman,et al.  Why tanh: choosing a sigmoidal function , 1992, [Proceedings 1992] IJCNN International Joint Conference on Neural Networks.

[12]  David A. Hsieh,et al.  Implications of Nonlinear Dynamics for Financial Risk Management , 1993, Journal of Financial and Quantitative Analysis.

[13]  Ah Chung Tsoi,et al.  Noisy Time Series Prediction using Recurrent Neural Networks and Grammatical Inference , 2001, Machine Learning.

[14]  Christian W. Dawson,et al.  An artificial neural network approach to rainfall-runoff modelling , 1998 .

[15]  Sam Ouliaris,et al.  Joint Variance Ratio Tests of the Martingale Hypothesis for Exchange Rates , 1997 .

[16]  Vassilis S. Kodogiannis,et al.  Forecasting Financial Time Series using Neural Network and Fuzzy System-based Techniques , 2002, Neural Computing & Applications.

[17]  Douglas Wood,et al.  Neural network protocols and model performance , 2003, Neurocomputing.

[18]  Efraim Turban,et al.  Neural Networks in Finance and Investing: Using Artificial Intelligence to Improve Real-World Performance , 1992 .

[19]  Bo K. Wong,et al.  A bibliography of neural network business applications research: 1988–September 1994 , 1995 .

[20]  Francesco Lisi,et al.  A comparison between neural networks and chaotic models for exchange rate prediction , 1999 .

[21]  Marcelo C. Medeiros,et al.  Modeling exchange rates: smooth transitions, neural networks, and linear models , 2001, IEEE Trans. Neural Networks.

[22]  Halbert White,et al.  Connectionist nonparametric regression: Multilayer feedforward networks can learn arbitrary mappings , 1990, Neural Networks.

[23]  Abdol S. Soofi,et al.  Modelling and forecasting financial data : techniques of nonlinear dynamics , 2002 .

[24]  Bo K. Wong,et al.  Neural network applications in finance: A review and analysis of literature (1990-1996) , 1998, Inf. Manag..

[25]  Se-Hak Chun,et al.  Impact of momentum bias on forecasting through knowledge discovery techniques in the foreign exchange market , 2003, Expert Syst. Appl..

[26]  Kin Keung Lai,et al.  An online learning algorithm with adaptive forgetting factors for feedforward neural networks in financial time series forecasting , 2007 .

[27]  Guoqiang Peter Zhang,et al.  An investigation of model selection criteria for neural network time series forecasting , 2001, Eur. J. Oper. Res..

[28]  Kin Keung Lai,et al.  Developing and assessing an intelligent forex rolling forecasting and trading decision support system for online e‐service , 2007, Int. J. Intell. Syst..

[29]  Min Qi,et al.  Nonlinear prediction of exchange rates with monetary fundamentals , 2003 .

[30]  Richard M. Levich,et al.  The Significance of Technical Trading-Rule Profits in the Foreign Exchange Market: a Bootstrap Approach , 1991 .

[31]  An-Sing Chen,et al.  Forecasting Exchange Rates Using General Regression Neural Networks , 1999, Comput. Oper. Res..

[32]  Jia He,et al.  A Variance‐Ratio Test of Random Walks in Foreign Exchange Rates , 1991 .

[33]  H. Maier,et al.  The Use of Artificial Neural Networks for the Prediction of Water Quality Parameters , 1996 .

[34]  Amit Mitra,et al.  Forecasting daily foreign exchange rates using genetically optimized neural networks , 2002 .

[35]  Kin Keung Lai,et al.  An integrated data preparation scheme for neural network data analysis , 2006, IEEE Transactions on Knowledge and Data Engineering.

[36]  Bo K. Wong,et al.  A bibliography of neural network business applications research: 1994-1998 , 2000, Comput. Oper. Res..

[37]  Michael Y. Hu,et al.  A Cross‐Validation Analysis of Neural Network Out‐of‐Sample Performance in Exchange Rate Forecasting , 1999 .

[38]  Kin Keung Lai,et al.  Forecasting Foreign Exchange Rates With Artificial Neural Networks: A Review , 2004, Int. J. Inf. Technol. Decis. Mak..

[39]  Kin Keung Lai,et al.  Credit Risk Analysis Using a Reliability-Based Neural Network Ensemble Model , 2006, ICANN.

[40]  Kin Keung Lai,et al.  TIME SERIES FORECASTING WITH MULTIPLE CANDIDATE MODELS: SELECTING OR COMBINING? , 2005 .

[41]  Vojislav Kecman,et al.  A data mining approach to financial time series modelling and forecasting , 2001, Intell. Syst. Account. Finance Manag..

[42]  Jefferson T. Davis,et al.  Predicting direction shifts on Canadian-US exchange rates with artificial neural networks , 2001, Intell. Syst. Account. Finance Manag..

[43]  Robert Gray,et al.  An intelligent business forecaster for strategic business planning , 1999 .

[44]  Thomas H. McCurdy,et al.  Tests of the Martingale Hypothesis for Foreign Currency Futures with Time-Varying Volatility , 1986 .

[45]  Steven Walczak,et al.  Heuristic principles for the design of artificial neural networks , 1999, Inf. Softw. Technol..

[46]  R. Baillie,et al.  Common Stochastic Trends in a System of Exchange Rates , 1989 .

[47]  Victor L. Berardi,et al.  Time series forecasting with neural network ensembles: an application for exchange rate prediction , 2001, J. Oper. Res. Soc..

[48]  Timothy Masters,et al.  Neural, Novel & Hybrid Algorithms for Time Series Prediction , 1995 .

[49]  Kin Keung Lai,et al.  An Adaptive BP Algorithm with Optimal Learning Rates and Directional Error Correction for Foreign Exchange Market Trend Prediction , 2006, ISNN.

[50]  Milton S. Boyd,et al.  Forecasting futures trading volume using neural networks , 1995 .

[51]  Chung-Ming Kuan,et al.  Forecasting exchange rates using feedforward and recurrent neural networks , 1992 .

[52]  Jimmy Shadbolt,et al.  Neural Networks and the Financial Markets: "Predicting, Combining And Portfolio Optimisation" , 2002 .

[53]  H. V. Dijk,et al.  Neural network pruning applied to real exchange rate analysis , 2002 .

[54]  An-Sing Chen,et al.  Regression neural network for error correction in foreign exchange forecasting and trading , 2004, Comput. Oper. Res..

[55]  Sam Ouliaris,et al.  Spectral Tests of the Martingale Hypothesis for Exchange Rates , 1995 .

[56]  Tae-Hwy Lee,et al.  Inference on Predictability of Foreign Exchange Rates via Generalized Spectrum and Nonlinear Time Series Models , 2003, Review of Economics and Statistics.

[57]  Michael Y. Hu,et al.  Combining conditional volatility forecasts using neural networks: an application to the EMS exchange rates , 1999 .

[58]  Geert Bekaert,et al.  Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets , 1991 .

[59]  R. Sweeney,et al.  Beating the Foreign Exchange Market , 1986 .

[60]  Kin Keung Lai,et al.  Mining Stock Market Tendency Using GA-Based Support Vector Machines , 2005, WINE.

[61]  Michael A. H. Dempster,et al.  Computational learning techniques for intraday FX trading using popular technical indicators , 2001, IEEE Trans. Neural Networks.

[62]  Guoqiang Peter Zhang,et al.  Time series forecasting using a hybrid ARIMA and neural network model , 2003, Neurocomputing.

[63]  G. Peter Zhang,et al.  Neural Networks in Business Forecasting , 2003 .

[64]  Ramazan Gençay,et al.  Linear, non-linear and essential foreign exchange rate prediction with simple technical trading rules , 1999 .

[65]  Mona R. El Shazly,et al.  Comparing the forecasting performance of neural networks and forward exchange rates , 1997 .

[66]  Mark P. Taylor,et al.  The Economics of Exchange Rates , 2002 .

[67]  Kenneth S. Rogoff,et al.  Exchange rate models of the seventies. Do they fit out of sample , 1983 .

[68]  Michael Y. Hu,et al.  Forecasting with artificial neural networks: The state of the art , 1997 .

[69]  Christian L. Dunis,et al.  Forecasting and Trading Currency Volatility: An Application of Recurrent Neural Regression and Model Combination , 2002 .

[70]  Paolo Tenti,et al.  Forecasting Foreign Exchange Rates Using Recurrent Neural Networks , 1996, Appl. Artif. Intell..

[71]  Kin Keung Lai,et al.  Double Robustness Analysis for Determining Optimal Feedforward Neural Network Architecture , 2005, ICNC.

[72]  E. Michael Azoff,et al.  Neural Network Time Series: Forecasting of Financial Markets , 1994 .

[73]  Apostolos Nikolaos Refenes,et al.  Currency exchange rate prediction and neural network design strategies , 1993, Neural Computing & Applications.

[74]  Jerome T. Connor,et al.  A Constrained Neural Network Kalman Filter for Price Estimation in High Frequency Financial Data , 1997, Int. J. Neural Syst..

[75]  Kin Keung Lai,et al.  A Novel Nonlinear Neural Network Ensemble Model for Financial Time Series Forecasting , 2006, International Conference on Computational Science.

[76]  Shouyang Wang,et al.  Testing for Long Memory in the Asian Foreign Exchange Rates , 2006, J. Syst. Sci. Complex..

[77]  James M. Nason,et al.  Nonparametric exchange rate prediction , 1990 .

[78]  Juan Julián Merelo Guervós,et al.  Evolving RBF neural networks for time-series forecasting with EvRBF , 2004, Inf. Sci..

[79]  Adam Fadlalla,et al.  An Analysis of the Applications of Neural Networks in Finance , 2001, Interfaces.

[80]  Jingtao Yao,et al.  A case study on using neural networks to perform technical forecasting of forex , 2000, Neurocomputing.

[81]  Ali M. Parhizgari,et al.  Predicting spot exchange rates in a nonlinear estimation framework using futures prices , 1997 .

[82]  David A. Hsieh,et al.  The statistical properties of daily foreign exchange rates: 1974–1983 , 1988 .

[83]  Yoshiteru Nakamori,et al.  AN EMPIRICAL ANALYSIS OF SAMPLING INTERVAL FOR EXCHANGE RATE FORECASTING WITH NEURAL NETWORKS , 2003 .

[84]  Kin Keung Lai,et al.  Designing a hybrid AI system as a forex trading decision support tool , 2005, 17th IEEE International Conference on Tools with Artificial Intelligence (ICTAI'05).

[85]  Hans Georg Graf.  Economic Forecasting for Management: Possibilities and Limitations , 2002 .

[86]  David Hsieh.  Testing for Nonlinear Dependence in Daily Foreign Exchange Rates , 1989 .

[87]  Berlin Wu,et al.  Model-free forecasting for nonlinear time series (with application to exchange rates) , 1995 .

[88]  B. LeBaron.  Technical Trading Rule Profitability and Foreign Exchange Intervention , 1996 .

[89]  Thomas H. McCurdy,et al.  Testing the Martingale Hypothesis in Deutsche Mark Futures with Models Specifying the Form of Heteroskedasticity , 1988 .

[90]  Kin Keung Lai,et al.  Hybridizing Exponential Smoothing and Neural Network for Financial Time Series Predication , 2006, International Conference on Computational Science.

[91]  Shiv Dutt Joshi,et al.  Study of Canada/US Dollar Exchange Rate Movements Using Recurrent Neural Network Model of FX-Market , 2003, IDA.

[92]  Elmar Steurer,et al.  Much ado about nothing? Exchange rate forecasting: Neural networks vs. linear models using monthly and weekly data , 1996, Neurocomputing.

[93]  Kin Keung Lai,et al.  A Neural Network and Web-Based Decision Support System for Forex Forecasting and Trading , 2004, CASDMKM.

[94]  Jason Kingdon.  Intelligent systems and financial forecasting , 1997, Perspectives in neural computing.

[95]  Steven Walczak,et al.  An Empirical Analysis of Data Requirements for Financial Forecasting with Neural Networks , 2001, J. Manag. Inf. Syst..

[96]  Edward Gately.  Neural networks for financial forecasting , 1995 .

[97]  Kurt Hornik,et al.  Multilayer feedforward networks are universal approximators , 1989, Neural Networks.

[98]  P. Lisboa,et al.  Business Applications of Neural Networks:The State-of-the-Art of Real-World Applications , 2000 .

[99]  Elia Kacapyr.  Economic Forecasting: The State of the Art , 1996 .