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A Markov Approach to Exchange Rate Sentiment Analysis of Major Global Currencies

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Document pages: 15 pages

Abstract: The paper deals with the analysis ofexchange rates sentiments. In the approach suggested here a typical exchangerate sentiment is defined on the basis of certain function of mean and standarderror of the logarithm of the ratio of successive daily exchange rates. Basedon this surmise, the exchange rate sentiments are classified into variousstates, whereby states are named according to the perceptions of the marketplayer. A Markov model is built to capture the uncertainties in exchange ratessentiments. The approach advocated here will be of interest to researchers,exchange rate traders and financial analysts. As an application of the proposedline of approach, we analyse weekly and monthly exchange rate sentiments thatgovern exchange rates of the major global currencies—EUR, GBP, SDR, YEN, ZAR,USD, using data from 2001-2012. Some interesting conclusions are revealed basedon the data analysis approach advocated in this paper.

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