Impact of momentum bias on forecasting through knowledge discovery techniques in the foreign exchange market

Abstract

Abstract To an increasing extent since the late 1980s, software learning methods including neural networks (NN) and case based reasoning (CBR) have been used for prediction in financial markets and other areas. In the past, the prediction of foreign exchange rates has focused on isolated techniques, as exemplified by the use of time series models including regression models or smoothing methods to identify cycles and trends. At best, however, the use of isolated methods can only represent fragmented models of the causative agents, which underlie business cycles. Experience with artificial intelligence applications since the early 1980s points toward a multistrategy approach to discovery and prediction. This paper investigates the impact of momentum bias on forecasting financial markets through knowledge discovery techniques. Different modes of bias are used as input into learning systems using implicit knowledge representation (NNs) and CBR. The concepts are examined in the context of predicting movements in the Japanese yen .