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Forecasting the US Dollar/Euro Exchange Rate

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

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Forecasting the US Dollar/Euro Exchange Rate

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  1. Forecasting the US Dollar/Euro Exchange Rate Group B John Hottinger Jingyu Nie Katharina Denk Alex Brown Joel Demartini Yuanchen Wang Doug Skipper-Dotta

  2. Exchange Rates • What are they? • We will be focusing on the U.S. Dollar vs Euro Exchange Rate • An exchange rate is how much one currency is worth compared to another currency • Current U.S./Euro 1.4272 i.e. it take $1.43 to buy one Euro

  3. Goal • We want to forecast what the exchange rate up to 6 months in the future

  4. A look at our data • We gathered monthly exchange rate data from www.oanda.com from May 2000 to May 2011.

  5. A Trace of the Data

  6. Things to note • Substantial drop for the U.S dollar compared to the Euro from 2002 to 2008 • Reasons: September 11, 2001. The war in Iraq and Afghanistan, the housing bubble and the U.S. accumulation of massive debt.

  7. The Histogram

  8. The Correllogram

  9. Unit Root test

  10. What does this all mean • The trace is evolutionary • In order to forecast or to have a meaningful forecast we need to make the data stationary • We were able to make the data stationary by using the box jenkins method

  11. Step 1: First differencing

  12. Whitened Histogram

  13. The Whitened Correllogram

  14. Whitened Unit Root Test

  15. Alternate Models

  16. Building our Final Model • We decided to use an intervention model due to the drastic drop in the exchange rate in 2002

  17. The Step Function Normal and First Differenced

  18. We begin to make our final model

  19. Actual Fitted Residual and histogram

  20. Serial Correlation Test and Correllogram

  21. Looking for Heteroskidasticity

  22. Adding a MA(23)

  23. The Correllogram

  24. Add an MA(26)

  25. Actual Fitted Residual and Histogram of Residuals

  26. Correllogram of residuals and Serial Correlation Test

  27. Time to forecast • 6 month whitened forecast

  28. Forecasted Values

  29. Forecasting 6 Months Previous

  30. Forecasted Values for Previous 6 Months

  31. Re-colored Forecast for Following 6 Months

  32. Re-Colored Forecast for Previous 6 Months

  33. Just because • We decided to forecast using exponential smoothing and see how are model would look

  34. Results • Exponential Model is very close to what our final model determined • We will have to wait and see if our forecasts are correct

  35. Thank you!!

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