Nonlinear prediction of exchange rate: A new approach to multiple time series analysis

This article offered an effective method to forecast daily exchange rate. Based on the inspecting and discriminating the nonlinearity structure of the exchange rate system, we use univariate and multivariate singular spectrum analysis for predicting the value and the direction of changes in the daily pound/dollar exchange rate. In prediction of daily pound/dollar rate, we use the rescaled and bootstrapped daily euro/dollar rate as a guidepost for the singular spectrum analysis method. We use the random walk model as a benchmark to evaluate performances of the singular spectrum analysis as a prediction method. Empirical results show that the forecast based on the multivariate singular spectrum analysis compares favorably to the forecast of the random walk model both for predicting the value and the direction of changes in the daily pound/dollar exchange rate.