CHANGING TIME-SCALE FOR SHORT-TERM FORECASTING IN FINANCIAL-MARKETS

A forecasting model based on high-frequency market makers' quotes of f inancial instruments is presented. The statistical behaviour of these time series leads to discussion of the appropriate time scale for fore casting. We introduce variable time scales in a general way and define the new concept of intrinsic time. The latter reflects better the act ual trading activity. Changing time scale means forecasting in two ste ps, first an intrinsic time forecast against physical time, then a pri ce forecast against intrinsic time. The forecasting model consists, fo r both steps, of a linear combination of non-linear price-based indica tors. The indicator weights are continuously re-optimized through a mo dified linear regression on a moving sample of past prices. The out-of -sample performance of this algorithm is reported on a set of importan t FX rates and interest rates over many years. It is remarkably consis tent. Results for short horizons as well as techniques to measure this performance are discussed.