1
$\begingroup$

I understand their abstract definition but having trouble applying the HMM method to Forex prices. What should the observations be? Then what should the states be (like "hot", "cold", etc.)?

$\endgroup$
3
$\begingroup$

Your decision. You can define the states to be "positive return" or "negative return". So if the return is negative, then its state would be that "negative return".

Or, you could even model them with continuous emission so as to define a state with a specific mu and variance. So that given the return at time T, you can say "it could technically be possible that this return be in any one of these states, but it's most likely that it's at this state given its mu and variance"

$\endgroup$
  • $\begingroup$ You didn't mention observations. $\endgroup$ – BananaCats Author Dec 16 '17 at 16:11
  • $\begingroup$ Please write some more. Perhaps an example. $\endgroup$ – BananaCats Author Dec 16 '17 at 21:22

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.