A Clustering-Based Nonlinear Ensemble Approach for Exchange Rates Forecasting

Abstract

A clustering-based nonlinear ensemble (CNE) learning approach is proposed in this paper to forecast exchange rates. In the proposed CNE learning approach: 1) a self-organizing map neural network is introduced to cluster the in-sample component forecasts; 2) kernel-based extreme learning machine is employed to calculate the in-sample ensemble weights for each cluster; and 3) the corresponding clusters’ in-sample ensemble weights are used for out-of-sample component forecasts to obtain the ensemble forecasts. To illustrate and verify the effectiveness of our proposed model, we test its directional and level forecasting accuracy using four major exchange rates. The out-of-sample forecasting performance results show that the proposed CNE learning approach consistently outperforms the component models and other ensemble learning approaches in terms of the directional forecasting accuracy and the level forecasting accuracy.