Forecasting exchange rates in the presence of instabilities

Many exchange rate papers articulate the view that instabilities constitute a major impediment to exchange rate predictability. In this thesis we implement Bayesian and other techniques to account for such instabilities, and examine some of the main obstacles to exchange rate models' predictive ability. We first consider in Chapter 2 a time-varying parameter model in which fluctuations in exchange rates are related to short-term nominal interest rates ensuing from monetary policy rules, such as Taylor rules. Unlike the existing exchange rate studies, the parameters of our Taylor rules are allowed to change over time, in light of the widespread evidence of shifts in fundamentals - for example in the aftermath of the Global Financial Crisis. Focusing on quarterly data frequency from the crisis, we detect forecast improvements upon a random walk (RW) benchmark for at least half, and for as many as seven out of 10, of the currencies considered. Results are stronger when we allow the time-varying parameters of the Taylor rules to differ between countries. In Chapter 3 we look closely at the role of time-variation in parameters and other sources of uncertainty in hindering exchange rate models' predictive power. We apply a Bayesian setup that incorporates the notion that the relevant set of exchange rate determinants and their corresponding coefficients, change over time. Using statistical and economic measures of performance, we first find that predictive models which allow for sudden, rather than smooth, changes in the coefficients yield significant forecast improvements and economic gains at horizons beyond 1-month. At shorter horizons, however, our methods fail to forecast better than the RW. And we identify uncertainty in coefficients' estimation and uncertainty about the precise degree of coefficients variability to incorporate in the models, as the main factors obstructing predictive ability. Chapter 4 focus on the problem of the time-varying predictive ability of economic fundamentals for exchange rates. It uses bootstrap-based methods to uncover the time-specific conditioning information for predicting fluctuations in exchange rates. Employing several metrics for statistical and economic evaluation of forecasting performance, we find that our approach based on pre-selecting and validating fundamentals across bootstrap replications generates more accurate forecasts than the RW. The approach, known as bumping, robustly reveals parsimonious models with out-of-sample predictive power at 1-month horizon; and outperforms alternative methods, including Bayesian, bagging, and standard forecast combinations. Chapter 5 exploits the predictive content of daily commodity prices for monthly commodity-currency exchange rates. It builds on the idea that the effect of daily commodity price fluctuations on commodity currencies is short-lived, and therefore harder to pin down at low frequencies. Using MIxed DAta Sampling (MIDAS) models, and Bayesian estimation methods to account for time-variation in predictive ability, the chapter demonstrates the usefulness of suitably exploiting such short-lived effects in improving exchange rate forecasts. It further shows that the usual low-frequency predictors, such as money supplies and interest rates differentials, typically receive little support from the data at monthly frequency, whereas MIDAS models featuring daily commodity prices are highly likely. The chapter also introduces the random walk Metropolis-Hastings technique as a new tool to estimate MIDAS regressions.

Machine learning techniques for implicit interaction using mobile sensors

Interactions in mobile devices normally happen in an explicit manner, which means that they are initiated by the users. Yet, users are typically unaware that they also interact implicitly with their devices. For instance, our hand pose changes naturally when we type text messages. Whilst the touchscreen captures finger touches, hand movements during this interaction however are unused. If this implicit hand movement is observed, it can be used as additional information to support or to enhance the users’ text entry experience. This thesis investigates how implicit sensing can be used to improve existing, standard interaction technique qualities. In particular, this thesis looks into enhancing front-of-device interaction through back-of-device and hand movement implicit sensing. We propose the investigation through machine learning techniques. We look into problems on how sensor data via implicit sensing can be used to predict a certain aspect of an interaction. For instance, one of the questions that this thesis attempts to answer is whether hand movement during a touch targeting task correlates with the touch position. This is a complex relationship to understand but can be best explained through machine learning. Using machine learning as a tool, such correlation can be measured, quantified, understood and used to make predictions on future touch position. Furthermore, this thesis also evaluates the predictive power of the sensor data. We show this through a number of studies. In Chapter 5 we show that probabilistic modelling of sensor inputs and recorded touch locations can be used to predict the general area of future touches on touchscreen. In Chapter 7, using SVM classifiers, we show that data from implicit sensing from general mobile interactions is user-specific. This can be used to identify users implicitly. In Chapter 6, we also show that touch interaction errors can be detected from sensor data. In our experiment, we show that there are sufficient distinguishable patterns between normal interaction signals and signals that are strongly correlated with interaction error. In all studies, we show that performance gain can be achieved by combining sensor inputs.