Data Analysis & Simulation

Archive for February, 2011

EasyFit Used for Probabilistic Currency Forecasting

Monday, February 21st, 2011

Because risk and uncertainty are a part of literally all areas of our life, with the finance being one of the most important areas, scientifically based risk management methods are gaining more and more popularity among the finance industry professionals. Currency fluctuations affect all businesses dealing with multiple currencies, so having at least some degree of certainty about the future exchange rates can be a significant success factor for any international enterprise. A wide range of currency forecasting methods have been developed, however, not many of them can pretend to be reliable in the long run: most algorithms only work for a short period of time, and need to be tweaked as the market conditions change.

Brijen Hathi, a Research Fellow at the Planetary & Space Sciences Research Institue, performs his own research in the field and publishes the results in the Currency Forecasting Blog. The forecasting methodology employed by Mr. Hathi is in part based on the same techniques used in probabilistic risk analysis. Like with most modern forecasting methods, in this approach, he uses historical data to predict the future, but the big difference here is that he also assigns specific probabilities to the predictions. For example, for a US-based company doing business in the UK, it doesn’t really matter what the exact GBP/USD exchange rate is going to be during the next 30 days, as long as it stays within a specific interval with a high probability (95% or more). Recently Mr. Hathi has published an article highlighting the use of EasyFit to model pricing probability of the Pound Sterling versus the US Dollar from historical data. It is fascinating to see how EasyFit is being used in (what we believe) a truly scientific approach to data analysis, and we hope to see new developments in this area soon.

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