forecasting the us dollar/euro exchange rate
DESCRIPTION
Forecasting the US Dollar/Euro Exchange Rate. Group B John Hottinger Jingyu Nie Katharina Denk Alex Brown Joel Demartini Yuanchen Wang Doug Skipper-Dotta. Exchange Rates. What are they? We will be focusing on the U.S. Dollar vs Euro Exchange Rate - PowerPoint PPT PresentationTRANSCRIPT
Forecasting the US Dollar/Euro Forecasting the US Dollar/Euro Exchange RateExchange Rate
Group BGroup B
John HottingerJohn HottingerJingyu NieJingyu Nie
Katharina DenkKatharina DenkAlex BrownAlex Brown
Joel DemartiniJoel DemartiniYuanchen WangYuanchen Wang
Doug Skipper-DottaDoug Skipper-Dotta
Exchange RatesExchange Rates
• What are they?What are they?• We will be focusing on the U.S. Dollar We will be focusing on the U.S. Dollar
vs Euro Exchange Ratevs Euro Exchange Rate• An exchange rate is how much one An exchange rate is how much one
currency is worth compared to currency is worth compared to another currencyanother currency
• Current U.S./Euro 1.4272 i.e. it take Current U.S./Euro 1.4272 i.e. it take $1.43 to buy one Euro$1.43 to buy one Euro
GoalGoal
• We want to forecast what the We want to forecast what the exchange rate up to 6 months in the exchange rate up to 6 months in the futurefuture
A look at our dataA look at our data
• We gathered monthly exchange rate We gathered monthly exchange rate data from www.oanda.com from May data from www.oanda.com from May 2000 to May 2011. 2000 to May 2011.
A Trace of the DataA Trace of the Data
Things to noteThings to note
• Substantial drop for the U.S dollar Substantial drop for the U.S dollar compared to the Euro from 2002 to compared to the Euro from 2002 to 20082008
• Reasons: September 11, 2001. The Reasons: September 11, 2001. The war in Iraq and Afghanistan, the war in Iraq and Afghanistan, the housing bubble and the U.S. housing bubble and the U.S. accumulation of massive debt.accumulation of massive debt.
The HistogramThe Histogram
The CorrellogramThe Correllogram
Unit Root testUnit Root test
What does this all meanWhat does this all mean
• The trace is evolutionaryThe trace is evolutionary
• In order to forecast or to have a In order to forecast or to have a meaningful forecast we need to meaningful forecast we need to make the data stationarymake the data stationary
• We were able to make the data We were able to make the data stationary by using the box jenkins stationary by using the box jenkins methodmethod
Step 1: First differencingStep 1: First differencing
Whitened HistogramWhitened Histogram
The Whitened CorrellogramThe Whitened Correllogram
Whitened Unit Root TestWhitened Unit Root Test
Alternate ModelsAlternate Models
Building our Final ModelBuilding our Final Model
• We decided to use an intervention We decided to use an intervention model due to the drastic drop in the model due to the drastic drop in the exchange rate in 2002exchange rate in 2002
The Step Function Normal and The Step Function Normal and First DifferencedFirst Differenced
We begin to make our final We begin to make our final modelmodel
Actual Fitted Residual and Actual Fitted Residual and histogramhistogram
0
2
4
6
8
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-0.04 -0.02 0.00 0.02 0.04
Series: ResidualsSample 2000M07 2011M04Observations 130
Mean 5.79e-17Median -0.000926Maximum 0.049209Minimum -0.052183Std. Dev. 0.019727Skewness -0.193567Kurtosis 3.164628
Jarque-Bera 0.958616Probability 0.619212
Serial Correlation Test and Serial Correlation Test and CorrellogramCorrellogram
Looking for Looking for HeteroskidasticityHeteroskidasticity
Adding a MA(23)Adding a MA(23)
The CorrellogramThe Correllogram
Add an MA(26)Add an MA(26)
Actual Fitted Residual and Actual Fitted Residual and Histogram of ResidualsHistogram of Residuals
Correllogram of residuals and Correllogram of residuals and Serial Correlation TestSerial Correlation Test
Time to forecastTime to forecast
• 6 month whitened forecast6 month whitened forecast
-.06
-.04
-.02
.00
.02
.04
.06
M5 M6 M7 M8 M9 M10
2011
DUSD_EURF ± 2 S.E.
-.08
-.06
-.04
-.02
.00
.02
.04
.06
00 01 02 03 04 05 06 07 08 09 10 11
DUSD_EUR FORECASTFORECAST+2*SEF FORECAST-2*SEF
Forecasted ValuesForecasted Values
Forecasting 6 Months Forecasting 6 Months PreviousPrevious
-.06
-.04
-.02
.00
.02
.04
.06
M11 M12 M1 M2 M3 M4
2010 2011
DUSD_EURF1 ± 2 S.E.
Forecast: DUSD_EURF1Actual: DUSD_EURForecast sample: 2010M11 2011M04Included observations: 6Root Mean Squared Error 0.022872Mean Absolute Error 0.020886Mean Abs. Percent Error 126.5962Theil Inequality Coefficient 0.831111 Bias Proportion 0.001057 Variance Proportion 0.168977 Covariance Proportion 0.829967
-.08
-.06
-.04
-.02
.00
.02
.04
.06
00 01 02 03 04 05 06 07 08 09 10 11
DUSD_EUR FORECAST1FORECAST1+2*SEF1 FORECAST1-2*SEF1
Forecasted Values for Previous Forecasted Values for Previous 6 Months6 Months
Re-colored Forecast for Re-colored Forecast for Following 6 MonthsFollowing 6 Months
0.6
0.7
0.8
0.9
1.0
1.1
1.2
00 01 02 03 04 05 06 07 08 09 10 11
USD/EUR USD_EURFUSD_EURF+2*SEF USD_EURF-2*SEF
Re-Colored Forecast for Re-Colored Forecast for Previous 6 MonthsPrevious 6 Months
0.6
0.7
0.8
0.9
1.0
1.1
1.2
00 01 02 03 04 05 06 07 08 09 10 11
USD/EUR USD_EURFUSD_EURF+2*SEF1 USD_EURF-2*SEF1
Just becauseJust because
• We decided to forecast using We decided to forecast using exponential smoothing and see how exponential smoothing and see how are model would lookare model would look
ResultsResults
• Exponential Model is very close to Exponential Model is very close to what our final model determined what our final model determined
• We will have to wait and see if our We will have to wait and see if our forecasts are correctforecasts are correct
Thank you!!Thank you!!