8
$\begingroup$

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.

Thanks

$\endgroup$
  • $\begingroup$ Just to be sure: you don't mean this paper: ena.lp.edu.ua:8080/bitstream/ntb/2983/1/110.pdf, do you? $\endgroup$ – Bob Jansen Jul 31 '14 at 19:43
  • 1
    $\begingroup$ This paper is better but a worse match to your question: research-and-analytics.csfb.com/docView?docid=GaEE3h $\endgroup$ – Bob Jansen Jul 31 '14 at 20:24
  • $\begingroup$ @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) $\endgroup$ – Matt Aug 1 '14 at 9:58
3
$\begingroup$

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.

$\endgroup$
  • $\begingroup$ 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. $\endgroup$ – Matt Oct 2 '14 at 2:05
  • $\begingroup$ You're welcome! $\endgroup$ – Felix Oct 2 '14 at 7:21
  • $\begingroup$ @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. $\endgroup$ – Phil H Oct 2 '14 at 9:59
  • $\begingroup$ @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.) ;-) $\endgroup$ – Matt Oct 3 '14 at 3:49
  • $\begingroup$ @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... $\endgroup$ – Phil H Oct 3 '14 at 8:27
0
$\begingroup$

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.

$\endgroup$
  • $\begingroup$ 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 $\endgroup$ – Matt Jul 31 '14 at 9:22

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.