Report on: Exchange rate

volatility

Course Name:(Financial Derivatives), FIN:4329

Fall 2019

Submitted to
Course instructor: Md. Qamruzzaman

Section: B

Submitted By

Name Id
Barshan Kumar Bhowmick 111 162 057
Wahidul Haque Khan Saniel 111 161 179
Munira Khan Majlish 111 162 136
Rashed Mahmud 111 171 114
Md. Ariful Islam 111 143 006
Zannat Ara Noshin 111 161 234

Date: 17/12/ 2019

 INTRODUCTION
The rate of converting one currency into another currency is an exchange rate. The volatility is
how much the exchange rate fluctuates. The volatility of the exchange rate is defined as the risk
associated with unexpected exchange rate movements, it is the domestic currency's price relative
to another country's currency. Sources of exchange rate fluctuations are economic fundamentals
such as inflation rate, interest rate and balance of payments. Exchange rates are an indicator of
the international competitiveness of a country. The lower a country's exchange rates, the higher
the global market competitiveness of the country, and vice versa. Aizenman (1992) indicated that
the rise in volatility in the exchange rate contributes to a decrease in investment level. Excessive
volatility in the exchange rate decreases investor confidence in the business environment.
Obstfeld and Rogoff (1998) suggest that excessive exchange rate instability is harmful to the
domestic economy.

The theories about what causes economic growth have been tested for over 200 years and there is
constant work on new theory about what contributes to economic growth. A stable long-term
economic growth requires stable foreign-exchange and trade markets to ensure a stable Exchange
Rate system and favorable trade conditions. If exchange rate changes are not completely
anticipated an increase in exchange rate volatility can lead to a reduction in risk-averse agents '
international trade activities. The volatility of exchange rates affects how countries trade with
each other and the price fluctuations of foreign exchange rates, creating problems and
opportunities for trade between countries. Increased volatility of the exchange rate affects prices
of internationally traded goods due to foreign investors adding a risk premium to cover
movements of exchange rate fluctuations that reduce economic growth by decreasing
international capital flow to the country (McKinnon and Ohno, 1997). A high volatility of
exchange rates is associated with profit uncertainty, and businesses looking to invest in countries
with a high volatility of exchange rates in their local currency would thus avoid investments in
the country which ultimately reduces economic growth due to a reduction in investment (Cote,
1994).

The objective of this study is to find the relationship between commodity price and exchange rate
volatility. With ADS, PP, KPSS, OLS and Quartile Regression analysis the significance of the
variable and the relationship with exchange rate volatility of India will be interpreted. This
paper pursues the analysis and investigates how a change in variable can affect the exchange rate
volatility based on the relationship associated with coefficients of each variables. One result of
our study shows that Debt, Inflation or Total Revenue of India turns out to be a crucial factor in
determining the potential positive or negative effects of exchange rate volatility, so it is
conductible that commodity price of a country will be directly or indirectly affected by the
changes of variable. Since importers and exporters are on opposite sides of the market, exchange
rate volatility affects importers and exporters differently, thus knowing which variable will affect
commodity prices and how the prices will change will help the importers and exporters predict
the movements of the market.
 LITERATURE REVIEW

We have collected articles and found comprehensive summery of previous research on the topic
“Exchange Rate Volatility”. The articles have focused on commodity price, foreign and real
exchange rate, inflation, export & import, agricultural exchange rate that effecting exchange rate
volatility in different economies from various countries included Nigeria, US, Spain. Turkey,
Asian countries, Africa, UK, Ghana, Kuwait and Mongolia.

Empirical and model based analysis mostly including GARCH, SVAR, Conditional variance
model, SCM, ADF unit root test, Multiple regression ANOVA, Correlation Matrix, ARDL model,
ECM model etc. Numerous empirical studies used to investigate whether trade is influenced by
volatility of exchange rate.

The analysis found that some countries factors like import/export, economic condition, real income
and inflation had effects on price of commodity, interest rate and had reactions on exchange rate
volatility. The commodity price and trades of that countries had effects of increase and decrease
in currency. Also the evidence shows positive, negative or neutral effects on export & import, also
have impact on agricultural index price. It’s indicating high policy of “policy contagion”. The local
authorities will contract their own monetary stance as a way of avoiding the weakening of the
currency.
Authors Country Variables Methodology Findings
Tunç and Uganda multivariate Investigates the
Solakoglu The food price index, generalized impact of
(2016) Interest, autoregressive commodity price
Crude oil price index, conditional volatility spillovers
models on financial sector
stability.
Generalized Specifically, the
Vector spillover effects
Autoregressive between oil and
framework food price
volatility and the
constant volatility of a key
conditional macroeconomic
correlation indicator of
(CCC), importance to .

varying
conditional
correlation
(VCC) models
Osigwe (2015) Nigeria GDP Gross domestic simultaneous The analysis
product of Nigeria OILP equation revealed that while
Oil price RER Real world demand had
exchange rate TROP ECM is positive effect,
Trade openness INF incorporated exchange rate and
Inflation Correction world crude oil
Model production had
negative effect on
Engle-Granger oil price.
single equation
co-integration
Paul, Ali, kuwait Augmented Exchange rate
Soomro, Ali, and Dickey-Fuller plays an important
khawar Abbas test role in the
(2019) economic growth
Ordinary least of Kuwait. Kuwait
square indicate has the ability to
raise revenue
Diagnostic Tests through different
sources instead of
relying on oil
revenues and also
has the capability
to fascinate lots of
investments.
(Moslares & THE UNITED export volume and prices the squared Our results reveal
Ekanayake, STATES AND residuals from that exports depend
2015) SPAIN twenty import the ARIMA or positively on the
commodities ARCH or levels of foreign
GARCH economic activity
real exchange rate processes but negatively on
relative prices.
volatility of real Autoregressive
exchange rate Distributed Lag
(ARDL)
real exchange rate approach to
cointegration
bilateral nominal analysis,
exchange rate
Pesaran, Shin,
and Smith’s
(2001) bounds
testing approach
to cointegration

Distributed Lag
(ARDL)
approach
Osabuohien, Nigeria inflation rate Generalised The results reveal
Obiekwe, Urhie, Auto Regressive that exchange rate
and Osabohien output growth Conditional volatility has a
(2018) Heteroscedasticit positive and
unemployment rate of y (GARCH) significant effect
an economy on inflation in the
Vector Error long-run. Also
Correction suggests the
Model, parallel exchange
rate passes through
Variance to inflation in the
Decomposition short run while the
and Impulse official exchange
Response rate passes through
techniques to inflation in the
long-run
exclusively while
the parallel
exchange rate
passes through to
inflation in the
short run.
Taskinsoy Turkey Cryptocurrency comparative The evolution of
(2019) analysis money will
exchange rate eventually take the
multiple digital form
gold standard and its regression irrespective of
variation ANOVA, massive resistance.
tariff on steel imports scatter plot, Through this
factorial history, innovative
comparative ideas, technologies
analysis, and products/
correlation services have
matrix, always been
subject to a degree
of skepticism and
criticism or
rejection.
Buyandelger Mongolia productivity shock, SVAR empirical the exchange rate
(2015) domestic demand shock, eneral pass-through into
foreign demand shock equilibrium import price is
change (DSGE) incomplete in
import price New Keynesian Mongolian
inflation DSGE model economy and the
degree of pass-
through has
considerable
impact on the
economic
fluctuations in
terms of inflation
and output gap
variability
Buyandelger INDONESIA- exchange rate volatility ARDL bounds The result shows
(2015) US Indonesia’s imports testing approach that real exchange
performance from the US conditional error rate volatility has
and its regressors. correction model negative influence
of equations on Indonesia’s.
MASD methods And high exchange
Dickey Fuller rate volatility leads
Unit Roots Test to a decrease of
Indonesia’s import
volume from the
United States. If
Indonesia maintain
it’s trade balance, it
needs to keep
 manage floating
exchange rate.
(Mpofu & South Africa modiÖed version Many emerging
Peters, 2016) of a model by markets have
Frenkel sophisticated
nce. Önancial and
ance. The foreign exchange
cumulative markets that
abnormal exhibit high levels
returns(CAR) of volatility.

(Jena, 2016) macroeconomic ARDL model There is long run

variables on individual ECM model cointegration
commodity price between
wholesale index price agriculture index
commodity index price and also
Treasury Bill rate as a between energy
substitute for the interest index price. But,
rates there is no long-run
cointegration
between metal
index price. There
are positive IIP and
Exchange rate and
significant effects
on the agricultural
index price
(Adekunle & Nigeria Agricultural Guarantee ADF unit root Fiscal and
Ndukwe, 2018) Credit Scheme Fund test monetary
(AGCSF) loan Bounds test for authorities in
government expenditure cointegration, Nigeria should
on agriculture Descriptive ensure that the full
exchange rate Statistics potentials of the
Nigeria’s GDP deflator agricultural sector
toilette for the
growth and
development of the
country.
Zhang, Dufour et UK Causality at different Vector The
al. (2016) horizons autoregressive main results are st
Causality across horizons moving average urdy to removing
VARMA models (VARMA) U.S.-dollar
models. denomination effe
cts and which
include a brief-
term hobby
 charge because
the conditioning
variable.
In assessment with

in
advance outcomes
at the non-
predictability
of exchange
quotes, we
discover that the
macroeconomic/alt
ernate-based
totally mechanism
plays a significant
position in alternat
e-price
dynamics, regardle
ss
of the monetary fe
ature of
these markets.
(Beckmann, volatility spillover effect GARCH-in- Volatility
Czudaj et al. between gold prices and mean of dollar exchange
2015) exchange rates SVAR models ratemore frequentl
y outcomes in inte
nse hedging functi
ons
of gold price.
Furthermore, the
gold price denomi
nated
inside
the US dollar has a
tendency to growth
after a
depreciation of
the dollar.

(Mohaddes and 69 commodity- CToT volatility CS-ARDL CToT volatility

Raissi 2017) dependent regressions exerts
countries Barro cross- a bad impact on ec
sectional onomic boom (wor
regression king through decre
ase
 accumulation
of physical capital
and decrease TFP),
the
common effect is
dampened if a
rustic has a SWF
and better instituti
onal excellent (hen
ce a greater strong
government expen
diture).
(Frankel 2017) Algiers Options The Consumer This
Indexing debt to the Price paper suggests 4 a
commodity price Index (CPI) pproaches that
commodity-
exporters can
make themselves
much less inclined.
1. use option
contracts to
hedge agai
nst short-
term declin
es inside
the commo
dity
2. Commodit
y-
linked bon
ds can
hedge
longer-
term dange
r
3. The nicely-
documente
d pro-
cyclicality
of monetar
y coverage
among com
modity
exporters
may
be reduced
 by
using insul
ating legit
4. Monetary p
olicy can
be made ro
botically m
ore counter
-cyclical
(Addison, Africa International agricultural Kilian and This paper
Ghoshray et al. commodity prices Vigfusson quantifies
2016) The real per capita GDP (2011a) the impact of
agricultural
commodity charge
shocks the usage
of a structural non-
linear
dynamic model.
The
novel component o
f this take a look
at is that
we determine whet
her or
not the reaction of
in line with capital
GDP for the
chosen Sub-
Saharan
African countries i
s distinct to surpris
ing increases in
agricultural
commodity costs i
nstead of decreases
in fees.
We conclude that t
here's very
little proof that an
unanticipated rate i
ncrease (decrease)
will result
in a significantly d
istinctive response
in according
to capital incomes.
(Mackton, Kenya An Exchange Rate Generalized In kenya
Nyongesa et al. Nominal Exchange Rate Autoregressive the real powerful alt
(2018)) Nominal Effective Conditional ernate rate has
Exchange Rate Heteroscedasticity been volatile
Real Exchange Rate (GARCH) inside
Real Exchange Rate the period below atte
Volatility ntion to be able
Real Effective Exchange to upload price to the
Rate dornbusch
overshooting model,
production flexibilit
y
and chance aversion
theories and partial
& popular equilibriu
m
theories, additionall
y the components of
fiscal & financial
rules might
be helped to deal
with macroeconomic
shocks in
kenya economic
system, related
to reer surprise.

Imoughele and Nigeria Exchange Rate (EXR) Spurious The most enormous
Ismaila (2015) Real Gross Domestic Regression effect at
Product (RGDP) the growth of non-
Inflation Rate (INFR) Co-Integration oil export inside
Degree Of Economic Test the nigerian econom
Openness (OPEN) ic
Broad Money Supply (M2) system are exchange
Credit To The Private charge, money supp
Sector (CPS) ly, credit to the non-
public region & eco
nomic overall
performance and if
the change rate incre
ases it places a terrib
le effect on non-oil
export.
Hadi, Hussain et Malaysia Interest Pearson With
al. (2019) Crude Oil Price Correlation the adjustments in
Analysis crude oil rate in the
course
Empirical Model of the length before
asian debt disaster in
1997, rm is much
less at risk
 of alternate with
it however while rm
peg was removed in
2005,
it became found that
rm became more sen
sitive toward change
s in crude
oil charge over short
haul
Boubakri, 46 Commodity M2/Gdp Panel Smooth The volatility of
Guillaumin et al. Exporting Commodity Transition the actual commodit
(2019) Countries Foreign Exchange Markets Regression y fees has a non-
(PSTR) linear impact at
the currency misalig
nment that's highligh
ted by way
of predicted coeffici
ents,
which depends at
the financial develop
ment level of
the usa, additionally
the dynamics based
totally at the type
of commodity
exported by the coun
try.
Boubakri, 42 Commodity Real Effective Exchange Co-Integration Relationship betwee
Guillaumin et al. Exporting Rate (REER) Relationship n reer
(2019) Countries Net Foreign Asset Position and actual commodit
Commodity Terms Of Panel Smooth y fee volatility is
Trade Transition non-linear
Balassa-Samuelson Effect Regression & depends on
M2/GDP (PSTR) the diploma of
fictionalization of
the
commodity market.
The volatility of
the real commodity r
ate has
a sturdy & bad impa
ct at the variant in
reer when usa is in
poorly integrated fin
ancially but whilst a
country is
strongly incorporate
d,
a lower in impact of
real commodity pric
 e volatility on reer
for food & beverage
s as well
as electricity.
Makhlouf, Kellard 69 Low And Child Mortality ‘Commodity Child
et al. (2017) Middle-Low Commodity Terms-Of- Terms-Of-Trade’ mortality increases
Income Countries Trade (CTOT)’ with
Institutional Quality, commodity phrases-
Democracy And Other Panel Least- of-trade volatility
Variables Squares in exceptionally com
Estimations modity dependent i
mporters. In low
First-Difference to lower center earni
Model ngs international
locations the import
diversification,
hedging and
institutional first-
class may
be progressed by
way
of impact approach t
o
enhance infant well
being.
Addison, Sub-Saharan International Agricultural Non-Linear Because of the
Ghoshray et al. Africa Commodity Prices Dynamic Model uncertainty
(2016) Real Per Capita Gdp in surprising agricult
ural price shocks
the viable asymmetr
y does not exist
or appear to
be too vulnerable to
be detected within
the information.
Bakas and United States Unobservable Uncertainty VAR If there's a nice shoc
Triantafyllou Shocks k in each macroecon
(2018) Observable Uncertainty OLS Regression omic
Shocks Analyses and monetary uncert
Volatility Of Individual ainty, it results
Commodity Markets in a sluggish increas
e in
commodity market i
ndex
& character commo
dity price volatility.
Energy commodities
has extra impact in
comparison to
agricultural
& steel markets.
Moslares and United States Volatility Of Real Multivariate Error- Relative charges has
Ekanayake (2015) &Spain Exchange Rate Correction Model poor effect on each
Real Exchange Rate exports &
Consumer Price Index Autoregressive imports but overseas
Industrial Production Index Distributed Lag economic
Bilateral Nominal (ARDL) system has
Exchange Rate a superb effect on
The Relative Price Ratio exports
and home economic
system has
a tremendous effect
on imports.
(Osigwe (2015)) Nigeria Real Exchange Rate The Error Real trade rate puts
Oil Price Volatility Correction Model a terrible effect on
Inflation Rate the oil fee and
GDP 1% increase in
World Gross Domestic oil fee might definite
Product ly affect the financia
World Crude Oil l performance of
Production nigeria with the aid
Terms Of Trade of the value of 4%, b
Trade Openness ecause of
this increase in
oil price places a pos
itive effect on financ
ial overall
performance.
(Agiomirgianakis, Russia a) the real effective theory of negative effect of
Serenis et al. 2015) exchange rate; cointegration, volatility to tourists'
b) the relative prices error correction arrivals for Iceland.
between destination and representation of
origin and the exchange rate
c) the income, volatility measures
approximated by the GDP using the
in PPS of set or major Autoregressive
countries of tourist's origin. Distributed Lags
(ARDL) modeling
to cointegration
(Muhammad, Azu Nigeria real GDP growth, annual similar more foreign
et al. 2018) Real Exchange Rate, regressions, investment
traditional compared to the
standard deviation, military regimes.
co-efficient of
variance and ratio
analysis which are
said to lack
robustness,
(Davig, Melek et Japan domestic demand, VAR approach Over the last 14
al. 2015) macroeconomic, months, the average
 price of oil has fallen
by about 60 percent
(Davig, Melek et China import prices and exchange regression method, import prices for
al. 2015, Hong and rate fluctuations in 13 industries of
Zhang 2016) industries machinery and
equipment (HS16) is
incomplete.

(Naseem, Mohsin Pakistan Exchange Rates multiple having a leverage

et al. 2019) regression effect in RPEX point
methods out that negative
shocks involve a
higher next period
conditional variance
positive shock of the
same enormity
(Kapusuzoglu and Turkey Agriculture commodity empirical models No causality
Ulusoy 2015) prices, oil prices relationship from the
agricultural
commodity prices to
world the oil prices
has been
observed.(Fourie,
Pretorius et al. 2016)
(Fourie, Pretorius South Africa exchange rates and Growth equation, exchange rate
et al. 2016) economic growth movements affect
economic growth.

(Mikhaylov 2018) Russia exchange rate, domestic iterations for volatility can be
and foreign goods cumulative sums predicted using the
of squares, FIGARCH model if
FIGARCH mode the structural breaks
are incorporated in
the model
Abdoh, Yusuf et al. ASEAN countries Inflation rate, interest rate, Panel Data Export is the most
(2016) export, import, GDP, tax Analysis significant factor
which influences the
exchange rate
movement at
ASEAN countries.
Aytuğ and Finance 14 emerging observation of exchange Synthetic control Reserve option
(2017) countries(Argenti rate, interest rate method (SCM) mechanism (ROM)
na, Brazil, Chile differential, inflation has decreased and
Colombia, Czech differential, asset when CBRT does
Republic, transfer from the US, and not change short
Hungary, CDS variables, interest rate term interest rate
India, Indonesia, spreads, asset transfers, CPI during capital
Mexico, Poland, inflation differential, and outflows, the ROM
Romania, Russia the volatility of the can work efficiently .
South Africa, and
 Turkey) and the TR-USD exchange rate at
Euro group different periods
(Obioesio, Atan et Africa L.TRB , REER, Std. Dev. Moving Standard Through empirical
al. 2017) REER, Absolute REER, Deviation finding, it has known
Conditional Var. REER, Approach, that there is strongly
inflation, Per-capita GDP, Absolute negative linkage
Resource Rents, External Percentage between exchange
Reserve, Trade Openness, Change in rate volatility and
HFC, Private investment, Exchange Rate, trade flows in Africa.
Fiscal Balance Conditional
Variance Model
Bahmani- 12 African Exports, imports, real Bounds testing Combine the short-
Oskooee, Gelan et countries income, world income, approach run dynamics into
al. (2018) effective exchange rate, the long-run model
exchange rate volatility to differentiate the
individual impact of
real exchange-rate
volatility on exports
and imports of 12
African countries.
Tunc, Solakoglu et Five East Asian 𝐴𝐵𝐸𝑅, 𝐷𝐵𝐸𝑅, 𝐴𝐸𝐸𝑅, and IMF World Bilateral exchange
al. (2018) countries 𝐷𝐸𝐸𝑅 for the appreciation Economic Outlook rate volatility
of BER, depreciation of database represses trade
BER, appreciation of EER, between two
and depreciation of EER, countries. External
LBERV, SBERV, LEERV, exchange rate
SEERV volatility shows
positive contribution
to the trade between
them.
Beckmann, Czudaj USA, Europe, Five different currencies Structural In strong hedging
et al. (2015) UK, Japan, India (US dollar, British pound vector auto function of gold, the
sterling, euro, Japanese regression volatility increases
yen, and Indian rupee) , (SVAR), of dollar exchange
Gold prices, bilateral Generalized rate. After a
exchange rates ARCH (GARCH) depreciation of
dollar, increases the
gold price.
Alagidede and Ghana nominal exchange rates Generalized The short run output
Ibrahim (2017) (RER) and interest rates ARCH (GARCH), causes exchange rate
(INTR) GDP per ADF test fluctuation in Ghana.
capital(RGDP), trade
openness (OPEN),
government expenditure
(GEXP), money supply
(MS), foreign direct
investment and portfolio
flows (FDI), output
(OUTPUT), terms of trade
(TOT), domestic credit
 provided to private sector
(DOMCR), labor (LAB),
gross fixed capital
(GFCF) and inflation
(INFL)
Edwards (2015) Chile, Colombia Interest rates, exchange contagion It’s indicating high
and Mexico rates, commodity price policy of “policy
indexes, country risk, Latin contagion”. The
American central banks’ local authorities will
policy rates contract their own
monetary stance
(hike their own
policy rates) as a way
of avoiding the
weakening of the
currency.
Investigation along
these should shed
onto the “true”
degree of monetary
independence in
small countries with
flexible exchange
rates.

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 UNIT ROOT TEST
ADF PP KPSS
T-stat p-value T-stat p-value T-stat
DCF -1.226182 0.6520* -0.982411 0.7495* 0.640833*
DCF -2.012150 0.2805* -4.409268 0.0012*** 0.090030**
DCP -1.193890 0.6661* -0.450953 0.8895* 0.628983*
DCP -1.705775 0.4197* -5.165275 0.0001*** 0.143205*
DCP01 -1.193890 0.6661* -0.450953 0.8895* 0.628983*
DCP01 -1.705775 0.4197* -5.165275 0.0001*** 0.143205*
DEBT -2.218997 0.2032* -2.215137 0.2045* 0.512537*
DEBT -5.541508 0.0000*** -5.583404 0.0000*** 0.175336*
EXV -2.454853 0.1345* -2.547497 0.1130* 0.064648**
EXV -6.538908 0.0000*** -6.546475 0.0000*** 0.068976**
FDI -1.732057 0.4073* -1.749717 0.3988* 0.448960*
FDI -6.054087 0.0000*** -6.054087 0.0000*** 0.074703**
FIA 4.939981 1.0000* 3.805942 1.0000* 0.539912*
FIA -2.740605 0.0772** -2.648115 0.0931** 0.510121*
INF -3.199327 0.0280** -3.155453 0.0310** 0.285312*
INF -8.376419 0.0000*** -8.491164 0.0000*** 0.078125**
MS -0.987967 0.7472* -0.751575 0.8209* 0.697208*
MS -3.906527 0.0049* -3.906527 0.0049** 0.153350*
TR -1.616854 0.4636* -1.107726 0.7025* 0.488656*
TR -2.523588 0.1187* -4.619233 0.0007*** 0.159754*

*** = 1% level, ** = 5% level, *= 10% level

 INTERPRETATION
ADF
Variable P-value Hypothesis Interpretation
DCF P(0.6520)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCF P(0.2805)>.10 Ho is accepted Data is not stationary or there is unit root.
DCP P(0.6661)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCP P(0.4197)>.10 Ho is accepted Data is not stationary or there is unit root.
DCP01 P(0.6661)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCP01 P(0.4197)>.10 Ho is accepted Data is not stationary or there is unit root.
Debt P(0.2032)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔDebt P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
Exv P(0.1345)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔExv P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
FDI P(0.4073)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔFDI P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
FIA P(1.0000)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔFIA P(0.0772) <.10 Ho is not accepted Data is stationary or there is no unit root.
INF P(0.0280) <.10 Ho is not accepted Data is stationary or there is no unit root.
ΔINF P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
MS P(0.7472)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔMS P(0.0049) <.10 Ho is not accepted Data is stationary or there is no unit root.
TR P(0.4636)>.10 Ho is accepted Data is not stationary or there is unit root.
ΔTR P(0.1187)>.10 Ho is accepted Data is not stationary or there is unit root.

PP
Variable P-value Hypothesis Interpretation
DCF P(0.74945) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCF P(0.0012) <.10 Ho is not accepted Data is stationary or there is no unit root.
DCP P(0.8895) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCP P(0.0001) <.10 Ho is not accepted Data is stationary or there is no unit root.
DCP01 P(0.8895) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔDCP01 P(0.0001) <.10 Ho is not accepted Data is stationary or there is no unit root.
Debt P(0.2045) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔDebt P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
Exv P(0.1130) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔExv P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
FDI P(0.3988) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔFDI P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
FIA P(1.0000) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔFIA P(0.0931) <.10 Ho is not accepted Data is stationary or there is no unit root.
INF P(0.0310) <.10 Ho is not accepted Data is stationary or there is no unit root.
ΔINF P(0.0000) <.10 Ho is not accepted Data is stationary or there is no unit root.
MS P(0.8209) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔMS P(0.0049) <.10 Ho is not accepted Data is stationary or there is no unit root.
TR P(0.7025) >.10 Ho is accepted Data is not stationary or there is unit root.
ΔTR P(0.0007) <.10 Ho is not accepted Data is stationary or there is no unit root.
 KPSS
Variable P-value Hypothesis Interpretation
DCF P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔDCF P< 1% Ho is not accepted Data is stationary or there is no unit root.
DCP P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔDCP P< 1% Ho is not accepted Data is stationary or there is no unit root.
DCP01 P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔDCP01 P< 1% Ho is not accepted Data is stationary or there is no unit root.
Debt P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔDebt P< 1% Ho is not accepted Data is stationary or there is no unit root.
Exv P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔExv P< 1% Ho is not accepted Data is stationary or there is no unit root.
FDI P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔFDI P< 1% Ho is not accepted Data is stationary or there is no unit root.
FIA P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔFIA P< 1% Ho is not accepted Data is stationary or there is no unit root.
INF P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔINF P< 1% Ho is not accepted Data is stationary or there is no unit root.
MS P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔMS P< 1% Ho is not accepted Data is stationary or there is no unit root.
TR P< 1% Ho is not accepted Data is stationary or there is no unit root.
ΔTR P< 1% Ho is not accepted Data is stationary or there is no unit root.

ORDINARY LEASE SQUARE REGRESSION

DCF DCP DEBT FDI INF FIA MS TR C

OLS -0.001262 0.003272 0.000868 -0.007330 0.003842 -0.100327 -0.000271 -0.000515 -0.007556

[-0.697167] [1.468991] [2.963917] [-0.600735] [3.723513] [-0.715177] [-0.232430] [-2.103624] [-0.214627]

(.4912) (0.1526) (0.0060) (0.5527) (0.0008) (0.4802) (0.8178) (0.0442) (0.8316)

*** *** **

QUANTILE REGRESSION

DCF DCP DEBT FDI INF FIA MS TR C

0.20 0.003492 0.001188 0.001302 -0.003558 0.002183 -0.216026 -0.002519 -0.000332 -0.103385

[1.18004] [0.412463] [3.220837] [-0.233502] [1.266244] [-1.045874] [-1.710079] [-0.906281] [-1.589258]

(0.2476) (0.6830) (0.0031) (0.8170) (0.2155) (0.3043) (0.0979) (0.3723) (0.1228)

*** *
0.30 -0.001141 0.001652 0.000888 -0.006221 0.004910 0.018705 0.000202 -0.000329 -0.026583
[-0.61820] [0.758855] [2.777348] [-0.597139] [3.464484] [0.122255] [0.134315] [-1.482015] [-0.772221]

(0.5413) (0.4541) (0.0095) (0.5550) (0.0017) (0.9035) (0.8941) (0.1491) (0.4462)

***
0.40 -0.001171 0.001842 0.000784 -0.008591 0.004905 -0.018437 0.000318 -0.000363 -0.022876
[-0.508399] [.707282] [2.101942] [-0.667245] [3.072226] [-0.104838] [0.177925] [-1.297218] [-0.551367]

(0.6150) (0.4850) (0.0444) (0.5099) (0.0046) (0.9172) (0.8600) (0.2048) (0.5856)

** *** *
0.50 -0.001093 0.001979 0.000847 -0.006588 0.005547 -0.050718 0.000433 -0.000420 -0.0388-
[-0.490665] [0.809610} [2.347604] [-0.472302] [3.826312] [-0.280649] [0.250118] [-1.563565] [1.04148236
]
(0.6274) (0.4248) (0.0259) (0.6402) (0.0006) (0.7810) (0.8043) (0.1288) (0.3063)

** ***

0.60 -0.000589 0.000563 0.000906 -0.004298 0.005895 0.128349 0.000400 -0.000285 -0.052244
[-0.290698] [0.248304] [2.888728] [-0.350599] [4.717562] [0.843229] [0.265750] [-1.178372] [-1.575297]

(0.7734) (0.8056) (0.0072) (0.7284) (0.0001) (0.4060) (0.7923) (0.2482) (0.1260)

*** ***
0.70 -0.002376 0.002601 0.000900 -0.008017 0.005794 0.080322 0.000887 -0.000540 -0.023332
[-1.123725] [1.128269] [2.891551] [-0.528809] [4.656118] [0.573238] [0.581954] [-2.213629] [-0.735303]

(0.2703) (0.2685) (0.0072) (0.6010) (0.0001) (0.5709) (0.5651) (0.0349) (0.4681)

*** *** **
0.80 -0.004162 0.002395 0.000426 -0.016004 0.004456 -0.083699 0.003635 -0.000927 0.024605
[-0.930831] [0.670840] [0.712967] [-0.851813] [2.636247] [-0.453328] [0.894539] [-1.597034] [0.325973]

(0.3596) (0.5076) (0.4816) (0.4013) (0.0133) (0.6537) (0.3784) (0.1211) (0.7468)

**
0.90 -0.007259 0.007967 0.000560 -0.017869 0.004862 -0.141436 0.001883 -0.000946 0.113960

0.95 -0.007259 0.007967 0.000560 -0.017869 0.004862 -0.141436 0.001883 -0.000946 0.113960
 OLS REGRESSION INTERPRETATION
For OLS estimation, we observed that DCF is negatively associated with exchange rate volatility
(coefficient – 0.001262), since P value was higher than 10% so we can’t judge that the variable
will impact the exchange rate volatility.

For OLS estimation, we observed that DCP is positively associated with exchange rate volatility
(coefficient 0.003272), since P value was higher than 10% so we can’t judge that the variable will
impact the exchange rate volatility.
For OLS estimation, we observed that Debt is positively associated with exchange rate volatility
(coefficient 0.000868), since P value was lower than 10% (Significant variable) so we can
conclude that 10% increase in Debt will result in 0.0868% increase in exchange rate volatility
For OLS estimation, we observed that FDI is negatively associated with exchange rate volatility
(coefficient – 0.007330), since P value was higher than 10% so we can’t judge that the variable
will impact the exchange rate volatility.
For OLS estimation, we observed that INF is positively associated with exchange rate volatility
(coefficient 0.003842), since P value was lower than 10% (Significant variable) so we can
conclude that 10% increase in INF will result in 0.3842% increase in exchange rate volatility.
For OLS estimation, we observed that FIA is negatively associated with exchange rate volatility
(coefficient – 0.007330), since P value was higher than 10% so we can’t judge that the variable
will impact the exchange rate volatility.
For OLS estimation, we observed that MS is negatively associated with exchange rate volatility
(coefficient – 0.000271), since P value was higher than 10% so we can’t judge that the variable
will impact the exchange rate volatility.
For OLS estimation, we observed that TR is negatively associated with exchange rate volatility
(coefficient -0.000515), since P value was lower than 10% (Significant variable) .
For OLS estimation, we observed that C is negatively associated with exchange rate volatility
(coefficient – 0.007556), since P value was higher than 10% so we can’t judge that the variable
will impact the exchange rate volatility.
Note: In OLS regression it is visible that the positive coefficient indicates a positive relation
with the exchange rate volatility, and negative coefficient indicates a negative relation with the
exchange rate volatility. The effect is more volatile if probability of less than 10% suggests
there is significant relationship with the variables and the exchange rate. The rates will either
move to stability upwards or deviate downwards depending on the positive or negative relation
with the exchange rate. The test also found that Debt, INF and TR were significant for the
exchange rate volatility in the India.
 QUANTILE REGRESSION INTERPRETATION

For quantile regression with r=.20, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.001302). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.1302%

For quantile regression with r=.20, we observed that there is a negative association between MS
and exchange rate volatility (coefficient of -0.00259). This implying that 10% increase of MS will
result in decrease of exchange rate volatility by 0.2519%

For quantile regression with r=.30, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.000888). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.0888%

For quantile regression with r=.30, we observed that there is a positive association between INF
and exchange rate volatility (coefficient of 0.004910). This implying that 10% increase of INF will
result in increase of exchange rate volatility by 0.4910%

For quantile regression with r=.40, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.000784). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.0784%

For quantile regression with r=.40, we observed that there is a positive association between INF
and exchange rate volatility (coefficient of 0.004905). This implying that 10% increase of INF will
result in increase of exchange rate volatility by 0.4905%

For quantile regression with r=.50, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.0000847). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.00847%

For quantile regression with r=.50, we observed that there is a positive association between INF
and exchange rate volatility (coefficient of 0.005547). This implying that 10% increase of INF will
result in increase of exchange rate volatility by 0.5547%

For quantile regression with r=.60, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.000906). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.0906%

For quantile regression with r=.60, we observed that there is a positive association between INF
and exchange rate volatility (coefficient of 0.005895). This implying that 10% increase of INF will
result in increase of exchange rate volatility by 0.5895%
For quantile regression with r=.70, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.000900). This implying that 10% increase of DEBT
will result in increase of exchange rate volatility by 0.0900%

For quantile regression with r=.70, we observed that there is a positive association between INF
and exchange rate volatility (coefficient of 0.005794). This implying that 10% increase of INF will
result in increase of exchange rate volatility by 0.5794%

For quantile regression with r=.70, we observed that there is a negative association between TR
and exchange rate volatility (coefficient of -0.000540). This implying that 10% increase of TR will
result in decrease of exchange rate volatility by 0.0540%

For quantile regression with r=.80, we observed that there is a positive association between DEBT
and exchange rate volatility (coefficient of 0.004456). This implying that 10% increase of debt
will result in increase of exchange rate volatility by 0.4456%

Note: In quantile regression it is visible that the negative or positive coefficient indicates a
negative or positive relation respectively, with the exchange rate volatility. Probability of less than
10% suggests there is significant relationship with the variables and the exchange rate, and the
effect is more volatile. The rates will either move to stability upwards or deviate downwards
depending on the positive or negative relation with the exchange rate. It outcome depending on
the variables vary with different quantiles, as in debt variable with r = .20 will have one relationship
with exchange rate and debt variable with r = .50 will have different one.
 CONCLUSION
The analysis was conducted to understand which of the variables are significant for the change
in exchange rates volatility in India. We conducted ADS, PP, KPSS, OLS and quartile
regression analysis to interpret the significance of the variable and the relationship with
exchange rate volatility of India.

 Debt has a positive association with exchange rates volatility

 Inflation is positively associated with exchange rates volatility
 Total Revenue has a negative association with exchange rates volatility

From our analysis we can infer that the exchange rate In India will be change for the change
in any of this variable which are 1) DEBT 2) INFLATION 3) TOTAL REVENUE. Debt
has a positive association with exchange rate volatility which means that increase in
country’s overall debt will increase the exchange rate. Also inflation is positively correlated
with exchange rate volatility which means the change in inflation rate will also increase the
exchange rate of the country. But Total Revenue is negatively related with the exchange rate
volatility which indicates that the overall increase in the revenue of a country will decrease
the exchange rate. The analysis results suggest that the country should try to keep control
on debt and inflation and try to increase the total revenue in order to balance the exchange rate.