:

Lahore School of Economics

Time Series Analysis of Real Exchange Rate of Pakistani Rupees per US Dollar

Group Members
Ahmer Zaman Khan
Umair Kiani
Armaghan Khan
Farrukh Hussnain

Dated
02/02/2012

Submitted to:
Dr. Syeda Rabab

Descriptive Statistics:
Mean1

StDev1

Minimum1

Maximum1

77.3516

10.3110

60.3978

90.1357

The data we have selected is monthly exchange rate in rupees between Pakistan Rupee
and the American Dollar. Since the standard deviation is high, this means that data is diversified
from the mean. The largest difference in the exchange rate is during April 2008, when the
exchange rate rose by 4.04 rupees. Moreover, the exchange rate has risen consistently over the
five years taken into account, which however, were mainly due to the instable political condition
and inept administering of the Pakistan government.
Time Series Plot:
The data is on the exchange rate between Pakistani Rupee and the American Dollar. The
data range is from the Feb 2007 to January 2012. We can see that the trend of the data is
increasing.

Time Series Plot of Prices_1

90
85

Prices_1

80
75
70
65
60
Feb

Aug

Feb

Aug

Feb

Aug
Month

Feb

Aug

Feb

Aug

Trend Analysis:
This is the Trend Analysis of the data. Trend that can be identified from the data is
upward trend.
Trend Analysis Plot for Prices_1
Linear Trend Model
Yt = 60.81 + 0.542*t

95

Variable
Actual
Fits

90

Accuracy Measures
MAPE
4.8286
MAD
3.6462
MSD
16.3621

Prices_1

85
80
75
70
65
60
Feb

Aug

Feb

Aug

Feb

Aug Feb
Month

Aug

Feb

Aug

Moving Average:
Moving Average Plot for Prices_1
Variable
Actual
Fits

90
85

Moving Av erage
Length 4
Accuracy
MAPE
MAD
MSD

Prices_1

80
75

Measures
1.77922
1.36697
5.19865

70
65
60
Feb

Aug

Feb

Aug

Feb

Aug Feb
Month

Aug

Feb

Aug

Exponential Smoothing:
Smoothing Plot for Prices_1

Prices_1

Single Exponential Method

90

Variable
Actual
Fits

85

Smoothing C onstant
Alpha
1.37647

80

Accuracy
MAPE
MAD
MSD

75
70
65
60
Feb

Aug

Feb

Aug

Feb

Aug Feb
Month

Aug

Feb

Aug

Measures
0.80659
0.61456
1.08954

Exponential smoothing and moving average are similar in that they both assume a
stationary, not trending, time series. They differ in that exponential smoothing takes into account
all past data, whereas moving average only takes into account k past data points. Technically
speaking, they also differ in that moving average requires that the past k data points be kept,
whereas exponential smoothing only needs the most recent forecast value to be kept.

Autocorrelation:
Autocorrelation Function for Prices_1

(with 5% significance limits for the autocorrelations)

1.0
0.8

Autocorrelation

0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1

8
Lag

10

11

12

13

14

15

From this we can infer that the trend in increasing.

Partial Autocorrelation:
The data is not stationary that can be seen through the partial and autocorrelation graphs.

Partial Autocorrelation Function for Prices_1

(with 5% significance limits for the partial autocorrelations)

1.0

Partial Autocorrelation

0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1

Differencing:
Month Prices

Difference

Feb-07 60.7321

Mar-07 60.6927

-0.03942

Apr-07 60.7052

0.01253

May-07 60.6718

-0.03343

Jun-07 60.6256

-0.04621

Jul-07 60.3978

-0.22780

Aug-07 60.5145

0.11671

Sep-07 60.6376

0.12311

Oct-07 60.6795

0.04194

Nov-07 61.0003

0.32071

Dec-07 61.1798

0.17950

Jan-08 62.3667

1.18697

8
Lag

10

11

12

13

14

15

Feb-08 62.6185

0.25178

Mar-08 62.7500

0.13152

Apr-08 63.5556

0.80556

May-08 67.6009

4.04535

Jun-08 67.2563

-0.34465

Jul-08 70.5896

3.33332

Aug-08 74.2926

3.70302

Sep-08 77.1668

2.87412

Oct-08 80.4331

3.26632

Nov-08 79.9239

-0.50914

Dec-08 78.9238

-1.00018

Jan-09 79.0856

0.16185

Feb-09 79.4485

0.36290

Mar-09 80.2355

0.78701

Apr-09 80.3958

0.16023

May-09 80.5268

0.13102

Jun-09 80.9574

0.43062

Jul-09 82.0062

1.04879

Aug-09 82.7716

0.76540

Sep-09 82.8462

0.07460

Oct-09 83.2176

0.37137

Nov-09 83.4540

0.23647

Dec-09 84.0021

0.54811

Jan-10 84.5184

0.51629

Feb-10 84.8991

0.38068

Mar-10 84.3500

-0.54911

Apr-10 83.9386

-0.41143

May-10 84.3318

0.39321

Jun-10 85.2844

0.95259

Jul-10 85.5031

0.21871

Aug-10 85.6070

0.10392

Sep-10 85.7618

0.15478

Oct-10 85.9416

0.17986

Nov-10 85.5440

-0.39767

Dec-10 85.7072

0.16320

Jan-11 85.6778

-0.02936

Feb-11 85.3141

-0.36371

Mar-11 85.3380

0.02393

Apr-11 84.6278

-0.71022

May-11 85.2122

0.58441

Jun-11 85.7859

0.57366

Jul-11 86.0204

0.23452

Aug-11 86.6211

0.60067

Sep-11 87.4744

0.85336

Oct-11 86.9655

-0.50895

Nov-11 86.9316

-0.03389

Dec-11 89.3402

2.40860

Jan-12 90.1357

0.79550

Autocorrelation Function for C2

(with 5% significance limits for the autocorrelations)

1.0
0.8

Autocorrelation

0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1

8
Lag

10

11

12

13

14

15

13

14

15

Partial Autocorrelation Function for C2

(with 5% significance limits for the partial autocorrelations)

1.0

Partial Autocorrelation

0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
1

8
Lag

10

11

12

Box Jenkins Model:

ARIMA Model: Prices_1
Estimates at each iteration
Iteration
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14

SSE
1167.17
926.16
723.33
552.15
410.15
295.79
207.85
145.80
109.03
98.16
97.98
97.97
97.97
97.97
97.97

0.100
0.250
0.400
0.550
0.700
0.850
1.000
1.150
1.300
1.418
1.422
1.422
1.422
1.422
1.422

Parameters
0.100 5.239
0.041 4.642
-0.023 4.072
-0.088 3.516
-0.155 2.969
-0.223 2.429
-0.291 1.894
-0.360 1.360
-0.428 0.822
-0.478 0.372
-0.475 0.304
-0.473 0.288
-0.472 0.284
-0.472 0.284
-0.472 0.283

Relative change in each estimate less than 0.0010

Final Estimates of Parameters
Type
AR
1
AR
2
Constant

Coef
1.4217
-0.4722
0.2834

SE Coef
0.1324
0.1320
0.2140

T
10.74
-3.58
1.32

P
0.000
0.001
0.192

Differencing: 0 regular, 1 seasonal of order 12

Number of observations: Original series 60, after differencing 48
Residuals:
SS = 97.2769 (back forecasts excluded)
MS = 2.1617 DF = 45
Modified Box-Pierce (Ljung-Box) Chi-Square statistic
Lag
Chi-Square
DF
P-Value

12
20.4
9
0.016

24
25.2
21
0.237

36
32.2
33
0.504

48
*
*
*

The AR1 model is not a good fit to the dataset because the constant is insignificant p value
(0.192) > 0.05 alpha value and the standard errors identified by the Box Pierce statistic are
significant because all p values are less than alpha value.

ARIMA Model: Difference

Estimates at each iteration
Iteration
0
1
2
3
4
5

SSE
111.402
102.086
99.781
99.774
99.774
99.774

Parameters
0.100 0.124
0.134 0.082
0.159 0.049
0.161 0.045
0.161 0.045
0.161 0.045

0.100
0.250
0.364
0.370
0.370
0.370

Relative change in each estimate less than 0.0010

Final Estimates of Parameters
Type
AR
1
AR
2
Constant

Coef
0.3702
0.1610
0.0445

SE Coef
0.1489
0.1519
0.2200

T
P
2.49 0.017
1.06 0.295
0.20 0.841

Differencing: 0 regular, 1 seasonal of order 12

Number of observations: Original series 59, after differencing 47
Residuals:
SS = 99.7585 (back forecasts excluded)
MS = 2.2672 DF = 44
Modified Box-Pierce (Ljung-Box) Chi-Square statistic
Lag
Chi-Square
DF
P-Value

12
20.2
9
0.017

24
25.9
21
0.209

36
32.6
33
0.486

48
*
*
*

Appropriate Model
Double Exponential Smoothing Method is best to forecast the values
Smoothing Plot for Prices_1
Double Exponential Method

Variable
Actual
Fits

90
85

Smoothing Constants
Alpha (lev el)
1.13526
Gamma (trend)
0.21093

Prices_1

80

Accuracy
MAPE
MAD
MSD

75

Measures
0.780086
0.596162
0.979356

70
65
60
1

12

18

24

30 36
Index

42

48

54

60

Comparison:
To see which model is best, compare the MAPE, MAD, and MSD of different models.
Trend
Trend with differencing
Single Exp smoothing
Double exp smoothing

MAPE
4.8286
400.022
0.80659
0.780086

MAD
3.6462
0.699
0.61456
0.596162

MSD
16.3621
1.068
1.08954
0.979356

So we can conclude that the double exponential smoothing is the best method for forecasting.