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DGB-FX v1.0 — A Risk-Aware, Regime-Weighted FX Valuation Model

DGB-FX v1.0 — A Risk-Aware, Regime-Weighted FX Valuation Model

  • August 10, 2025
  • Posted by: Drglenbrown1
  • Category: Quant Research
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DGB-FX v1.0: Dr. Glen Brown FX Valuation Method (1-Year Horizon)

DGB-FX v1.0: Dr. Glen Brown FX Valuation Method (1-Year Horizon)

Date: August 10, 2025 • Author: Dr. Glen Brown

Abstract

DGB-FX v1.0 adapts the Dr. Glen Brown Equity Valuation Method to foreign exchange by replacing equity anchors (EPS, P/E) with macro-monetary anchors (PPP, REER, IRP) and layering a regime-weighted, risk-aware engine governed by the Nine-Laws framework. The output is a one-year blended fair value per pair, complete with probability-weighted scenarios, a Margin-of-Safety (MOS), and consensus blending with REER and IRP. This article defines the full method and ships an operational calculator and Python script.

Why a New FX Valuation Model?

FX valuation must reconcile long-run “gravitational” anchors (PPP/REER) with near-to-medium-term carry and policy dynamics (IRP) while acknowledging regime behavior (trend vs. mean reversion) and risk asymmetries. DGB-FX v1.0 embeds that structure directly into the math and the workflow.

Core Inputs (per pair X/Y)

  • Spot (P0)
  • PPP anchor (FV0PPP) — e.g., OECD/IMF implied rate
  • Observation window tobs (months) — used to annualize deviation
  • Macro differentials (X − Y) — Current account (%GDP), GDP growth, etc.
  • REER fair value (optional)
  • IRP inputs — 1-year proxy rates rbase, rquote
  • Scenario probabilities — (Bull, Base, Bear)
  • Margin of Safety (MOS)

The Valuation Engine

1) Deviation & Annualization

D0 = P0 / FV0_PPP
EVGF_base = D0^(12 / t_obs)
EVDF_base = 1 / EVGF_base

2) Regime Scaling (Nine-Laws: Law 2)

EVGF_bull = 1 / (EVDF_base × 0.618)
EVGF_base_regime = EVGF_base
EVGF_bear = 1 / (EVDF_base × 1.382)

3) Fundamental Differentials (Law 4)

F_CA = 1 + β_CA × ΔCA
F_g  = 1 + β_g  × Δg
EVGF_s^adj = EVGF_s × F_CA × F_g

Elasticities β are calibrated on rolling history per pair. Optional overrides allow direct factor use.

4) Event Jumps (Law 5)

EVGF_bull^adj = EVGF_bull^adj × (1 + jump_bull)
EVGF_bear^adj = EVGF_bear^adj × (1 + jump_bear)

5) Scenario Fair Values (1-year)

FV_1,s = P0 × EVGF_s^adj

6) Probability Weighting & MOS (Laws 1 & 8)

FV_weighted = ∑ π_s × FV_1,s
FV_MOS = FV_weighted × (1 − MOS)

7) Consensus Blend (Law 6)

FV_final = average( FV_MOS, FV_REER (if present), FV_IRP )

IRP (1-year proxy): FV_IRP = P0 × (1 + r_quote) / (1 + r_base)

Worked Example: EURUSD (illustrative)

Using the inputs from our research note:

P0 = 1.1645
FV0_PPP = 1.35
t_obs = 7 months
ΔCA = +0.061;  Δg = −0.009
REER = 1.119712
r_base = 0.0200; r_quote = 0.0433
β_CA = 1.000; β_g = 5.555
jump_bull = 0.05
Probabilities: 30% / 50% / 20%
MOS = 15%

Results (rounded):

FV_bull ≈ 1.5479
FV_base ≈ 0.9110
FV_bear ≈ 0.6592
FV_weighted ≈ 1.0517 → FV_MOS ≈ 0.8940
FV_REER ≈ 1.1197; FV_IRP ≈ 1.1910
Blended FV_final ≈ 1.0682

Interpretation: blended FV is ~8.3% below spot → EUR downside vs USD under these assumptions.

Calibration & Validation (Law 9)

  1. Elasticities: Calibrate βCA, βg per pair on rolling 10–15y history.
  2. Regime weight: Introduce an η that gates trend vs. mean-reversion in EVGF (optional).
  3. Re-estimation cadence: Refresh PPP/REER quarterly; rates and jumps as needed.
  4. Backtests: Track out-of-sample error and turn the MOS up or down accordingly.

Execution Alignment (GATS + Nine-Laws)

  • Signal gating: Only express valuation when regime confirms (EMA Zones, HAS, ADX, GMACD).
  • Risk: Stops via DAATS/Death-Stop; exits on Death or adaptive BE per your framework.
  • Portfolio: Allocate by valuation conviction and regime quality; cap exposure under macro shocks.

Replicating the Workflow: GBPUSD, USDJPY, USDCAD

  1. Populate Inputs row with: P0, PPP, tobs, ΔCA, Δg, REER (optional), rbase, rquote, βs, jump(s), probabilities, MOS.
  2. Review Outputs: FV_bull/base/bear, FV_weighted, FV_MOS, FV_REER, FV_IRP, FV_final, mispricing.
  3. Adjust βs (or use overrides) to reflect each pair’s historical sensitivity to ΔCA and Δg.
  4. Feed the resulting conviction into GATS execution with your standard risk rules.

Download the Calculator & Script

  • Download the Excel calculator (DGB-FX v1.0)
  • Download the compact Python script
  • Download the CSV input template

Limitations & Good Practice

  • PPP/REER are slow-moving anchors; policy/carry can dominate for long stretches.
  • Elasticities are pair-specific; avoid “one-size-fits-all”.
  • MOS is not optional—turn it up in uncertain macro regimes.

About the Author: Dr. Glen Brown

Dr. Glen Brown is President & CEO of Global Accountancy Institute, Inc. and Global Financial Engineering, Inc.—closed, multi-asset proprietary trading firms. A financial engineer with 25+ years across markets, he is the architect of GATS, DAATS, and the Nine-Laws framework, integrating quantitative discipline with robust risk management and regime awareness.

Business Model Clarification

Global Accountancy Institute, Inc. (GAI) and Global Financial Engineering, Inc. (GFE) operate a closed proprietary trading model. We do not solicit or accept external clients or funds. All publications are for internal research, training, and educational purposes.

General Risk Disclaimer

Trading foreign exchange and other financial instruments involves significant risk and may not be suitable for all investors. Past performance does not guarantee future results. The information herein is educational and not investment advice. You are responsible for your own decisions and risk.



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