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Exchange rate
Using ARMA Models
LIUWEI (9906360)
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ABSTRACT.................................................................................. 3
1. INTRODUCTION ..................................................................... 4
2. DATA ANALYSIS..................................................................... 5
2.1 Stationary estimation .......................................................... 5
2.2 Dickey-Fuller Test............................................................... 6
3. MODEL CREATION................................................................. 8
3.1 AR Model ............................................................................ 8
3.2 MA Model.......................................................................... 10
3.3 ARMA Models................................................................... 11
4. COMPARING THE MODELS ................................................ 12
5. FORECASTING WITH THE BEST MODEL .......................... 12
6. REFERENCE......................................................................... 15
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Abstract
The aim of this paper is to forecast the exchange rate of US Dollar / Euro in
the month of February 2005, using different methods, such as AR, MA, and
ARIMA. Comparing the models by the Schwarz criterion, the best model is
selected. The Euro/ Us Dollar exchange rate data is selected from the
Austrian National Bank statistical data base.
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1. Introduction
We could see here the data of the exchange rate of US Dollar / Euro from
the beginning 1999 till end of 2004, total 1537 observations. The data points
for the year 1999 are 1 to 259, for 2000 they are 260 to 514, for 2001 they
are 515 to 769, for 2002 they are 770 to 1023, for 2003 they are 1024 to
1278, for 2004 they are 1279 to 1537. 20 observations in the first month of
2005 are reserved for forecasting.
1.4
1.3
1.2
1.1
1.0
0.9
0.8
250
500
750
1000
EXCHANGE_RATE
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1250
1500
The curve of the dollar/euro rate shown above tells the history of the Euro.
At the introduction of the Euro the rate was almost 1.16 US dollars, and the
rate went down for two years. In 2001 the exchange rate reached a
minimum and after that year euro went up. In 2004 the Euro increased to
almost 1.4 US dollars.
I use linear Time Series Analysis as the tool for the empirical analysis,
based on ARIMA models.
2. Data Analysis
2.1 Stationary estimation
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Prob.*
0.9722
Prob.
0.8463
0.9157
0.000119
0.006875
-7.119954
-7.113002
0.037565
0.846345
In this version without added trend, the unit-root test confirms that there is a
unit root in the data generating process (DGP). Thus, it appears that the
DGP is not stationary.
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Next, we take first differences of the data and check whether this
transformation implies stationarity. Now, the variable under investigation is
called D(Exchange_Rate).
Prob.*
0.0000
Prob.
0.0000
4.17E-06
0.009804
-7.120838
-7.117360
2.000908
We see that there is no unit root in the differenced data. The differenced
exchange rate appears to be stationary.
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3. Model Creation
3.1 AR Model
Autoregressive models are often well suited for modeling economic time
series.
An autoregressive model of first order can be written as:
X t = X t 1 + et ;
In short, the value of today depends on the value of yesterday. I would like
to say the behavior of the exchange market should be under some influence
from the price increase of yesterday or the day before yesterday.
I think we should use the AR(1) or AR(2) to estimate the first difference of
the data.
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500
750
1000
1250
1500
EX_1
The graph shows the first difference of the exchange rate data that we
found to be stationary.
Coefficient
Std. Error
t-Statistic
Prob.
AR(1)
-0.015946
0.025534
-0.624518
0.5324
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Inverted AR Roots
-0.000063
-0.000063
0.006876
0.072484
5462.683
-.02
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0.000122
0.006876
-7.120838
-7.117360
2.000908
3.2 MA Model
The moving-average model can also be a good model for economic data.
For example, the MA model of first order is:
y t = 0 + at 1 a t 1 .
Coefficient
Std. Error
t-Statistic
Prob.
MA(1)
-0.017267
0.025529
-0.676378
0.4989
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
-0.000026
-0.000026
0.006875
0.072505
5466.526
Inverted MA Roots
.02
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0.000119
0.006875
-7.121207
-7.117731
1.998331
Coefficient
Std. Error
t-Statistic
Prob.
AR(1)
MA(1)
0.519828
-0.543137
0.409129
0.402405
1.270572
-1.349726
0.2041
0.1773
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Inverted AR Roots
Inverted MA Roots
0.001437
0.000786
0.006873
0.072376
5463.834
.52
.54
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0.000122
0.006876
-7.121036
-7.114079
1.987838
The smaller the value of the Schwarz criterion, the better is the estimation.
We collect here the values for all three models: the Schwarz criterion for
AR(1) is -7.117360; for MA(1) it is -7.117731; and for ARMA(1,1) it
is -7.114079.
Why I would like to choose the date after 800. First, from the graph, we can
see the strong rising trend in the Euro/ Us Dollar exchange rate. Second, at
the beginning of the year 2002, some political and monetary political issues
has been changed. So the data after 800 is good for us to estimate the
changes in the exchange rate.
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Now, we have:
Prob.
0.4203
0.000669
0.006903
-7.104007
-7.097762
1.999597
Forecasting results of the exchange rate for the data from 1537 to 1557 are
as follows:
.00000
-.00001
-.00002
-.00003
-.00004
-.00005
-.00006
1540
1545
1550
EX_1F
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1555
A graph that includes the observations from #800 to #1536 as well as the
forecasts is given below.
.03
.02
.01
.00
-.01
-.02
-.03
1000
1250
1500
EX_1F
The graph confirms that changes in the exchange rate are predicted as zero,
except for the first step.
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6. Reference
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