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I came across a paper, not sure it originated from academia or a blog or such, that reported on applying principal components to build currency baskets from a set of individual currency pairs and to identify driving currencies. When I use the term basket then I mean a collection of individual cash fx pairs and to relate them linearly or non-linearly through different aggregator functions and weights. I am not talking about basket options here.

Has anyone come across such literature/paper/treatise/blog? I have spent a considerable amount of time in this area and only skimmed through that particular article, thought I had it bookmarked but apparently lost it. I am very interested in other related literature as well.


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Just to be sure: you don't mean this paper: ena.lp.edu.ua:8080/bitstream/ntb/2983/1/110.pdf, do you? – Bob Jansen Jul 31 '14 at 19:43
This paper is better but a worse match to your question: research-and-analytics.csfb.com/docView?docid=GaEE3h – Bob Jansen Jul 31 '14 at 20:24
@BobJansen, unfortunately not (the paper I came across was a published in 2014, sorry should have mentioned that), but nonetheless thank you for the two links, the first paper I was aware of but unfortunately aims at different objectives (raw material price minimization of variances) – Matt Wolf Aug 1 '14 at 9:58
up vote 2 down vote accepted

Perhaps this paper by Hyun Woo Byun and coauthors is what you're looking for: Using a Principal Component Analysis to develop Multi-Currency Trading algorithms in the FX market

They apply principal component analysis to a currency basket of 9 pairs with a 2 month rolling window. In a second step, various techniques (logistic regression, decision trees, neural networks) are used to make a predictions of the first PCA component, using technical indicators as predictors.

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Exactly what I was looking for, thanks a lot. I have no idea why it did not come up in any of my google searches. – Matt Wolf Oct 2 '14 at 2:05
You're welcome! – Felix Oct 2 '14 at 7:21
@MattWolf: Googling for the URL reveals 1 link to it, searching for the title reveals a few in Korean. In fact only by searching for '"principal component analysis" currency' on SSRN does it come up. – Phil H Oct 2 '14 at 9:59
@PhilH, sure when knowing the exact title. Apparently it was not that straightforward a find given I posted my question 2 months ago (and included the terms "principal components" and specifically mentioned I look for a paper that targets fx/currencies.) ;-) – Matt Wolf Oct 3 '14 at 3:49
@MattWolf: Sorry, that's exactly my point, that there's only 1 link even to the URL, so it's very unlikely to turn up in general searches. I was intrigued as to whether a different search or a different approach would succeed instead, and the best I could come up with was that direct search on SSRN. I might start future searches with SSRN, because evidently the more recent papers are not making it into Google's index. This paper now has a whole Q.SE post pointing at it, so it should appear on Google's radar... – Phil H Oct 3 '14 at 8:27

Try the BIS, they are the experts in this area. http://www.bis.org/statistics/eer/

There are two papers there which explain the methodology behind their currency indices.

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Thanks, I am familiar with the BIS methodology, but I am not looking for trade weighted indices. As mentioned I look for methodologies that exclusively source pricing data and preferably approaches that strip out individual currency strength/weakness – Matt Wolf Jul 31 '14 at 9:22

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