Forecasting the currency exchange rates by recurrent neural network

Pao Yue-kong Library Electronic Theses Database

Forecasting the currency exchange rates by recurrent neural network

 

Author: Lam, Chun-fat
Title: Forecasting the currency exchange rates by recurrent neural network
Degree: M.Sc.
Year: 1996
Subject: Foreign exchange -- Forecasting
Neural networks (Computer science)
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Pages: 86 leaves : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1230672
URI: http://theses.lib.polyu.edu.hk/handle/200/5169
Abstract: The objectives of my dissertation are to forecast four currency exchange rates by recurrent neural network. The four currencies are Japanese Yen, Deutsche Mark, Pound Sterling and Swiss Franc. The most powerful approach in forecasting the rates is to find a law underlying the given dynamic process. If we can get the law and understand the initial condition, we will be able to provide good predictions of the future behaviour. However, the rates are found to be chaotic and the dynamic process is incomplete. We cannot find a deterministic model to understand the time series. From my research, I note that classical statistical methods such as Box-Jenkins method have many limitation in understanding the pattern of currency exchange rates. The second powerful approach in forecasting the rates is to discover some strong empirical regularities in the observations of the past exchange rates. Unfortunately, some regularities such as periodicity are masked by noise. The error in the specification of the initial condition will also grow exponentially with time. The noise is so serious that even Box-Jenkins method cannot model the time series of exchange rates properly. Forecasting the exchange rates is a very challenging task. However, recurrent neural network is found to be a powerful tool to handle this task. Recurrent neural network can approximate or reconstruct any nonlinear function. Once a recurrent neural network is trained properly, it not only understands the time series but also generalizes what it learns to provide good estimation of exchange rates in the near future. Forecasting the exchange rates in short term basis is found to be possible.

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