Foreign exchange market

About: Foreign exchange market is a research topic. Over the lifetime, 6661 publications have been published within this topic receiving 153384 citations. The topic is also known as: forex & FX.

A stacked generalization system for automated FOREX portfolio trading

Abstract: Multiple FOREX time series forecasting is a hot research topic in the literature of portfolio trading. To this end, a large variety of machine learning algorithms have been examined. However, it is now widely understood that, in real-world trading settings, no single machine learning model can consistently outperform the alternatives. In this work, we examine the efficacy and the feasibility of developing a stacked generalization system, intelligently combining the predictions of diverse machine learning models. Our approach establishes a novel inferential framework that comprises the following levels of data processing: (i) We model the dependence patterns between major currency pairs via a diverse set of commonly used machine learning algorithms, namely support vector machines (SVMs), random forests (RFs), Bayesian autoregressive trees (BART), dense-layer neural networks (NNs), and naive Bayes (NB) classifiers. (ii) We generate implied signals of exchange rate fluctuation, based on the output of these models, as well as appropriate side information obtained by analyzing the correlations across currency pairs in our training datasets. (iii) We finally combine these implied signals into an aggregate predictive waveform, by leveraging majority voting, genetic algorithm optimization, and regression weighting techniques. We thoroughly test our framework in real-world trading scenarios; we show that our system leads to significantly better trading performance than the considered benchmarks. Thus, it represents an attractive solution for financial firms and corporations that perform foreign exchange portfolio management and daily trading. Our system can be used as an integrated part in international commercial trade activities or in a quantitative investing framework for algorithmic trading and carry-trade speculation.

Foreign Exchange Operations and the Federal Reserve

Abstract: Credibility for low inflation is the cornerstone of an effective monetary policy. And public support for Fed independence is the foundation of that credibility. Fed intervention in foreign exchange markets creates doubt about whether monetary policy will pursue low inflation or exchange rate objectives. Moreover, foreign exchange operations financed by the Fed undermine the Fed's independence, especially when they involve direct loans to foreign governments. For these reasons the authors recommend that the Fed be separated completely from foreign exchange operations with the Treasury.

Foreign Currency Borrowing by Small Firms

Abstract: We examine the firm-level and country-level determinants of the currency denomination of small business loans. We introduce an information asymmetry between banks and firms in a model that also features the trade-off between the cost of debt and firm-level distress costs. Banks in our model don’t know the currency in which firms have contracted their sales. When foreign currency funds come at a lower interest rate, all foreign currency earners and those local currency earners with low distress costs choose foreign currency loans. With imperfect information in the model concerning the currency in which the firms receive their earnings, even more local earners switch to foreign currency loans as they do not bear the full cost of the corresponding credit risk. We test these implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries that contains reports on 3,105 recent bank loans. We find that firms with foreign currency income and assets are more likely to borrow in foreign currency. In contrast we find only weak evidence that firm-level distress costs and financial opaqueness affect currency denomination. Interest rate advantages on foreign currency funds and exchange rate volatility partly explain differences in loan dollarization across countries, but not within countries over time. We find that country-level measures of information asymmetries (weak corporate governance and strong foreign bank presence) do encourage foreign currency borrowing, but only by foreign currency earning firms. All in all, we cannot confirm that information asymmetries and currency speculation are a key driving force of the recently observed increase in the dollarization of small business loans in Eastern European transition countries.