FX fair value model using Behavioral Equilibrium Exchange Rate (BEER) approach

  • 50%

    Cost savings

  • ~10

    currency pairs covered for fair value

  • A leading European bank wanted to develop a fair value model for major FX pairs to check whether any currency pair was undervalued or overvalued compared to its long-run fair value.
  • The bank also wanted to develop a quantitative method to predict how long it would take for the actual FX price to converge to its fair value.
  • Preparation
    • Data collection from public sources and other data subscriptions
    • Data cleaning for model input
    • Data manipulation and transformation for model development
    • Data maintenance for future iterations and model validation
  • Model fitting
    • Used the BEER approach
    • Identified four significant predictors for FX rates
    • Used panel regression for G10 currencies
    • Used Vector Error Correction Model (VECM) to know the speed of convergence to fair value
    • Used R and Python for model development
  • Result interpretation and publishing
    • Helped the client publish the findings of the model in research papers and other publications
    • Maintained the model to keep it up-to-date and in line with econometric assumptions
    • Tested tweaks in the model to improve forecasting accuracy


  • Set up a stable and robust model to estimate the fair value of the FX pairs and provide a direction for FX price movements in the medium to long term
  • Provided skilled manpower at a fraction of global costs
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Macroeconomic research support for a global investment bank
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Commodity research support for European bank
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