On Prediction of Euro and Pound Sterling using Box-Jenkins Approach
Keywords:
Forecasting, Exchange Rate, Box-Jenkins ARIMA Model, Model Selection Criteria.Abstract
The purpose of this study is to determine ARIMA models for forecasting euro and pound sterling using secondary data of closed rates of euro and pound sterling in terms of the US. dollar at every 4-hour from the 00:00 (GMT) of September 23, 2019, to the 20:00 (GMT) of November 29, 2019. The first 270 observations of each exchange rate are used as training data to develop the forecasting models and the remaining 30 observations are used as validation data for model evaluation. The ARIMA(p,d,q) where p=1,10, d=0, q=9, and ARIMA(p,d,q) where p=0, d=1, q=9 are proposed as the potential forecasting models for the euro exchange rate. For pound sterling exchange rate, the ARIMA(p,d,q) where p=1,2, d=0, q=6, and ARIMA (p,d,q) where p=0, d=1, q=6 are proposed. Then, the likelihood estimation method is employed to estimate the parameters of the proposed models. The Mean Square Error (MSE) and Mean Absolute Percentage Error (MAPE) are selectively used as the model selection criteria. The empirical results were found that the ARIMA(p,d,q) where p=1,10, d=0, q=9 is outstandingly selected to be the forecasting model of the euro exchange rate. In addition, the ARIMA(p,d,q) where p=1,2, d=0, q=6 is also determined as the forecasting model for the pound sterling exchange rate. We found that these forecasting models will be able to perform well only in a short time forecasting horizon. Therefore, the investor needs to modify the model with the incorporation of the actual observations when would like to perform a longer forecast horizon.
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