CIA -1, International Financial Management

Research Paper Analysis

Topic - Comparison of Recession during 2008 - 2009 and 2009-2013
through Chaotic Analysis of the Foreign Exchange Rates
Authors - Prof. Pritha Das, Dr. Atin Das
Published in - Journal of Contemporary Management
Year of Publishing - 2013

Sumbitted By,
Abhinandan.R.K
1421101
F1/IJK
CUIM

Comparison of Recession during 2008 - 2009 and 2009-2013 through Chaotic

Analysis of the Foreign Exchange Rates

Introduction to the paper

The Author has presented a very interesting analysis of Foreign Exchange Market trend after the
financial crisis of 2007-08 and compare it with the crisis situation by using Chaos theory. The
chaos theory consists of various mathematical and statistical methods which helps in the
revelation of some repeating time periods and cycles existence. The Authors have hands on
approach in determining a non linear data analysis of the data during 2007 Economic recession
and in that they have considered daily data for 12 countries, over the span of nearly 36 years. But
the present report aims at analyzing what effects foreign exchange rate late 2009 to 2013.
Although during 2011, global prospects are gradually strengthening again, but the downside risks
remain elevated according to IMF.
The Authors are trying to disseminate one particular parameter that has direct relation to Foreign
Exchange rate of a particular country. And this data collection also consists of Forex market and
Balance of Trade relation of all the 12 countries and the relationship between Forex Market and
GDP of all the 12 countries. The 12 countries selected for the analysis are Australia, Canada,
China, India, Japan, Malaysia, Singapore, Sri Lanka, Sweden, Switzerland, Thailand & UK.
Problem Identified in the research paper is
How to predict the Forex Market rate trend in recession and after the recession?
Research Methodology used by the Authors
The Authors have utilized many Mathematical tools especially Chaotic theory such as Large
Lyapunov Exponent, consisting of various mathematical and statistical tools which help in the
revelation of some repeating time periods.
Chaotic process helps to identify how small differences in the initial conditions can yield widely
diverging outcomes for such dynamical systems, rendering long-term prediction impossible in
general. meaning that their future behavior is fully determined by their initial conditions, with no
random elements involved. In other words, the deterministic nature of these systems does not
make them predictable. This behavior is known as deterministic chaos, or simply chaos.

Understanding of the Paper

At first, the author examines the effect of fundamental news and its impact on the Foreign
Exchange rates. Some of the important aspects that come into account are Inflation of the
Country, the money supply for the country under scrutiny, the money market rate which used as a
measure of the short term interest rate and trade balance relative to the GDP. In general, the
fluctuation in the foreign exchange rates are usually sensitive to significant changes in the above
important aspects but in the real market context, it is difficult to make out what makes the
exchange rate changes in the recession period. One of the main reasons for this is the
complication created by the Government of the particular country. For example, a policy issued
can create a different impact during the recession.
The Large Lyapunov Exponent (LE) model is helpful determining the extent of the recession in
Forex Market. The result of the data analysis in the research paper showed that LE is positive.
LE measures the rate at which information is lost from a system. Positive LE means, that the
information about initial conditions is easily lost, implying chaos. The larger the LE, the faster is
the loss and hence system is more chaotic.
The Research paper shows difficulty to acclimatize what makes Forex rate change during and
after recession. The mathematical model shows a scenario which is mostly non linear structure.
The Authors have concluded that markets are dynamic systems. The Chaos theory which consists
of mathematical analysis tool is of non linear dynamic systems.
Conclusion
The market prices have a random character with small trend component and the Chaos theory
excludes the opportunity of studying the market history by mathematical and statistical methods.
One of the most important findings of the research paper is that the sensibility of Foreign
Exchange rate to Balance of trade was independent because of the limited number of countries
been selected and an interesting behavior has cropped up at the end of the analysis, that with
varying degree of effect of recession on GDP in EU countries, all the countries had the same
Forex Rate.