Informative correlation extraction from and for Forex market analysis

The forex market is a complex, evolving, and a non-linear dynamical system, and its forecast is difficult due to high data intensity, noise/outliers, unstructured data and high degree of uncertainty. However, the exchange rate of a currency is often found surprisingly similar to the history or the variation of an alternative currency, which implies that correlation knowledge is valuable for forex market trend analysis. In this research, we propose a computational correlation analysis for the intelligent correlation extraction from all available economic data. The proposed correlation is a synthesis of channel and weighted Pearson's correlation, where the channel correlation traces the trend similarity of time series, and the weighted Pearson's correlation filters noise in correlation extraction. In the forex market analysis, we consider 3 particular aspects of correlation knowledge: (1) historical correlation, correlation to previous market data; (2) cross-currency correlation, correlation to relevant currencies, and (3) macro correlation, correlation to macroeconomic variables. While evaluating the validity of extracted correlation knowledge, we conduct a comparison of Support Vector Regression (SVR) against the correlation aided SVR (cSVR) for forex time series prediction, where correlation in addition to the observed forex time series data is used for the training of SVR. The experiments are carried out on 5 futures contracts (NZD/AUD, NZD/EUD, NZD/GBP, NZD/JPY and NZD/USD) within the period from January 2007 to December 2008. The comparison results show that the proposed correlation is computationally significant for forex market analysis in that the cSVR is performing consistently better than purely SVR on all 5 contracts exchange rate prediction, in terms of error functions MSE, RMSE, NMSE, MAE and MAPE. However, the cSVR prediction is found occasionally differing significantly from the actual price, which suggests that despite the significance of the proposed correlation, how to use correlation knowledge for market trend analysis remains a very challenging difficulty that prevents in practice further understanding of the forex market. In addition, the selection of macroeconomic factors and the determination of time period for analysis are two computationally essential points worth addressing further for future forex market correlation analysis