| Abstract: |
To model the factors affecting rupee dollar exchange rateTheoreticallly
justifying use of all right hand side variables affecting rupee dollar
exchange rate. Using FGLS,VAR,Bounds Approach and ARIMA for estimating the
relationships between rupee dollar exchangeThis study covers two main topics:
first modelling, where we discussed about the importance of variables like
capital inflows, order flows, central bank intervention in modelling exchange
rate. We empirically estimated the coefficients of explanatory variables after
overcoming autocorrelation and unit root problems. It was found that only
variables order flow, forward premium, trade balance, money supply and output
has significant effect on exchange rate. We also checked for any long term
relationship between variables, found that only money supply and output has
long run relationship with exchange rate. All significant variables shows very
small impact on exchange rate except forward premium. Empirical relations
between variables and exchange rate support the theoretical relations. Second
forecasting of exchange rate, we forecasted exchange rate using VAR, OLS,
ARIMA model for three different sample period. Evaluated the forecasting
performance of models by graphs and by error statistics. We found that VAR
model yield more accurate forecasts than the OLS and ARIMA as it has very low
Theil’s U and RMSE for all periods. Using VAR model we also forecasted out of
sample for periods from January 2014- June 2014. |