Report on

“Exchange Rate Forecasting by

Regression Analysis.”

Course Title: International Financial Management

Course Code: FIN-6501

Group No: 02
 Submitted To
Dr. Mohammad Bayezid Ali
Professor
Department of Finance
Jagannath University

Submitted By
Group: 02
Batch: 19th
Sec: B
Department of Finance
Jagannath University

Student Information
Name ID Batch

Jahid Hassan (Leader) M20190203349 19th

Snigdha Chanda M20190203347 19th

Nazmul Islam Tusher M20190203356 19th

Md Abul Hassan M20190203360 19th

Md. Tanvir Bhuiyan Akash M20190203369 19th

Date of Submission: 11/06/2022

 ACKNOWLEDGMENT

First, we want to pay our gratitude to Almighty Allah for keeping our

physically, mentally sound for prepare this report and also thankful to our

parents for keep us in this report praying. We would also like to express

heartfelt gratitude to our honorable sir Dr. Mohammad Bayezid Ali,

Professor, department of finance, Jagannath University. He always inspired

us though in our class period. He also guides us and assists in preparing this

report on “Exchange Rate Forecasting by Regression Analysis.”. His

valuable advice has helped we a lot to prepare this report. We are immensely

thankful to him for supports which he has provided during our report period.

Finally, this report would not have been possible without the dedicated and

contribution of our group mates who has helped and teaching all the works.

We have tried our best and also worked hard for prepare of report. And we

got very good response from our every group mate. We express our sincere

gratitude to all of them. Their valuable contribution is what made this report

possible.

i
 TABLE OF CONTENT

Introduction ------------------------------------------------------------------- 1
Literature Review------------------------------------------------------------- 5
Objectives of the study------------------------------------------------------- 7
Methodology ------------------------------------------------------------------ 7
Data Analysis------------------------------------------------------------------ 11
Data interpretation------------------------------------------------------------- 12
Findings and Analyzing------------------------------------------------------- 13
Limitation----------------------------------------------------------------------- 15
Conclusion---------------------------------------------------------------------- 15

ii
Introduction
Determining the exchange rate for a least developed country such as Bangladesh is important
because it allows economists to investigate international financial theories and it also allows policy
makers in this case to learn about ex ante policy and efficient forecasting techniques. Until now
there is no literature that models Bangladesh’s exchange rate.
Bangladesh is said to be a country with great potentials. Though many consider it over burdened
with huge population, many other consider this population as asset. Talking the positive aspects,
this population can easily contribute economic growth (rahman et al, 2006). Talking about the
negative aspects, this population requires a huge amount of daily necessities that may not be
possible for Bangladesh to produce and thus they are bound to go for foreign trade. Consequently,
Bangladesh falls in victim of irrational exchange rate. Exchange rate, in its simplest sense can be
defined as the ratio in which one country’s monetary value is converted to others. It is known that
the higher the exchange rate, the poorer will be the condition of the importing country and vice
versa. In such a case, there is no doubt to say that exchange rate has a direct impact on the economic
growth of any country(rizzo,1998). In the perspective of Bangladesh, there are a large number of
factors held responsible for increased exchange rate.

Exchange rate is an important variable which influences decisions taken by the participants of the
foreign exchange market, namely investors, importers, exporters, bankers, financial institutions,
business, tourists and policy makers both in the developing and developed world as well. Timely
forecasting of the exchange rates is able to give important information to the decision makers as
well as partakers in the area of the internal finance, buy and sell, and policy making. However, the
experimental literature be skeptical about the likelihood of forecasting exchange rates accurately
(Dua and Ranjan, 2011). The market where foreign exchange transactions are taken place is the
biggest as well the most liquid financial markets. The foreign exchange rate is one of the vital
economic indicators in the global monetary markets. For the giant multinational business units, an
accurate forecasting of the foreign exchange rates is crucial since it improves their overall
profitability (Huang et al., 2004).
Forecasting of a given financial variable is a vital task in the markets where financial transactions
are taken place and positively helpful for the stakeholders, namely practitioners; regulators; as well
as policy formulators of this market (Pradhan and Kumar, 2010). In the financial as well as
managerial decision-making process, forecasting is a crucial element (Majhi et al., 2009).
Forecasting of the exchange rate is the foremost endeavors for the practitioners and researchers in
1
the spree of international finance, particularly in case of the exchange rate which is floating (Hu
et al., 1999). Since the breakdown of Breton-Wood system, prediction of the exchange rate is
being more interested. To develop models for forecasting the exchange rates is important in the
practical and theoretical aspects. The importance of forecasting the exchange rates in practical
aspect is that an accurate forecast can render valuable information to the investors, firms and
central banks for in allocation of assets, in hedging risk and in formulating of policy. The
theoretical significance of an accurate forecasting exchange rate is that it has vital implications for
efficient market hypothesis as well as for developing theoretical model in the field of international
finance (Preminger and Franck, 2005). Some corporate tasks that make forecasting the foreign
exchange rate so important, namely hedging decision, short-term financing decision, short-term
investment decision, capital budgeting decision, earnings assessment and long-term financing
decision (Madura, 2006). To forecast exchange rate is a hectic task, but this is an inevitable for
taking financial decision in the era of internalization. The significance of the exchange rates’
forecasting stems from the reality that the findings of a given financial decision made today is
conditional on the exchange rate which will be prevailed in the upcoming period. For this reason,
forecasting exchange rate is essential for a various international financial transaction, namely
speculation, hedging as well as capital budgeting (Moosa, 2008). To understand the movements
of exchange rate is a tremendously challenging and essential task. Efforts for deepening our
understanding about the movements of exchange rate have taken some approaches. Primarily,
efforts concentrated to develop low-frequency basically based experimental models. The aim of
model estimation is to present an accurate forecast of exchange rate as well as to get better our
understanding the movements of exchange rate. The models could occasionally help to isolate the
shortcomings of our knowledge and put forward new way of research (Gradojevic and Yang,
2000). The outcomes of this study render all of the mentioned rationales. The motivation for this
study is to investigate the use of Regression Model (RM) model, when applied to the task of
forecasting and trading of the BDT/USD exchange rate using the Bangladesh Bank (BB) fixing
series.

2
Brief History of Exchange Rate System for
Bangladeshi taka
The currency of Bangladesh is Bangladesh Taka which was created to replace the Pakistan Rupee
in January 1972. Before 1983, the Taka was linked to Pound Sterling. The exchange rates for
currencies other than Sterling are based on the London market rates for the currencies concerned.
Started from January 1983, however, its intervention currency was changed to the U.S. Dollar.
Whatever the case may be, different countries adopt different exchange rate policies. Bangladesh,
the focus of this paper, had a fixed exchange rate system in place since January, 3 1972.
Bangladesh pursued a ‘fixed exchange rate’ regime up to 1979. After that, from 1979 to mid-2003,
it followed a managed floating exchange rate system. Repeated depression of the home money, for
maintaining a steady real exchange rate as well as keeping away from overvaluation of the local
taka, were the prime factors for taking new system of the foreign exchange system. From May,
2003, Bangladesh took almost a new policy known as ‘clean floating’ exchange rate policy by
creating fully convertible current account. But capital account convertibility is not yet done. The
main reasons for all the policies that Bangladesh took were due to improve export situation,
decrease import liability with the aim of improving balance of trade. Since then. Dr. Mirza Azizul
Islam, the former advisor, Ministry of Finance of the Caretaker Government of Bangladesh,
presented a paper in January 2003, right before the shift from fixed to floating regime, explaining
the overall performance of the fixed regime and the probable implications of the floating regime
on Bangladesh economy. He suggested that the experiences of other countries in the region show
that floating regime generates greater volatility in exchange rates and this sort of uncertainty is
likely to affect adversely the overall trade and investment climate which is already afflicted by
many unfavorable elements in Bangladesh (See Islam, 2003).

3
Key Factors That Affect Foreign Exchange
Rate
1. Inflation Rates: Changes in market inflation cause changes in currency exchange rates. A
country with a lower inflation rate than another’s will see an appreciation in the value of its
currency. The prices of goods and services increase at a slower rate where the inflation is low. A
country with a consistently lower inflation rate exhibits a rising currency value while a country
with higher inflation typically sees depreciation in its currency and is usually accompanied by
higher interest rates.
2. Interest Rates: Changes in interest rates affect currency value and exchange rate. ForEx rates,
interest rates, and inflation rates are all correlated. Increases in interest rates cause a country’s
currency to appreciate because higher interest rates provide higher rates to lenders, thereby
attracting more foreign capital.
3. Country’s Current Account / Balance of Payments: A country’s current account reflects the
balance of trade and earnings on foreign investment. It consists of total number of transactions
including its exports, imports, debt, etc. A deficit in current account due to spending more of its
currency on importing products than earning through sale of exports causes depreciation. Balance
of payments fluctuate exchange rate of its domestic currency.
4. Government Debt: Government debt is public debt or national debt owned by the central
government. A country with government debt is less likely to acquire foreign capital, leading to
inflation. Foreign investors will sell their bonds in the open market if the market predicts
government debt within a certain country.
5. Terms of Trade: Related to current accounts and balance of payments, the terms of trade is the
ratio of export prices to import prices. A country’s terms of trade improve if its exports prices rise
at a greater rate than its imports prices. This results in higher revenue, which causes a higher
demand for the country’s currency and an increase in its currency’s value.
6. Political Stability & Performance: A country’s political state and economic performance can
affect its currency strength. A country with less risk for political turmoil is more attractive to
foreign investors. Increase in foreign capital, in turn, leads to an appreciation in the value of its
domestic currency. A country with sound financial and trade policy does not give any room for

4
uncertainty in value of its currency. But, a country prone to political confusions may see a
depreciation in exchange rates.
7. Recession: Recession refers to a general downturn in any economy. A recession is associated
with high unemployment, slowing Gross Domestic Product (GDP) and high inflation.
8. Speculation: If a country’s currency value is expected to rise, investors will demand more of
that currency in order to make a profit in the near future. As a result, the value of the currency will
rise due to the increase in demand. With this increase in currency value comes a rise in the
exchange rate as well.

Literature Review
The likelihood to capture various patterns in the data as well as improvement of forecasting
performance can be enhanced through combining different models. A number of researches are
conducted on forecasting and trading financial series by the scholars and they suggest that by
combining various models, forecasting accuracy can be enhanced over an individual model. Khin
et al. (2011) state that the economic market model of supply-demand’s ex-ante forecast is more
perfect and efficient measured either in the context of its statistical decisive factor or by optical
immediacy with the actual prices. Pradhan and Kumar (2010) conducts a study on Forecasting
Exchange Rate in India: An Application of Artificial Neural Network (ANN) Model and reveal
that ANN model is a successful tool for forecasting the exchange rate. Moreover, they reveal that
it is possible to extract information concealed in the exchange rate and to predict it into the
upcoming. Sermpinis, Dunis and Laws (2010) mention that the Psi and the Genetic Expression
perform in the same way and their performance is better among all models in the context of
annualized returns and information ratio prior to and following the application of the trading
strategy. They also reveal that all models with the exception of ARMA demonstrate an extensive
augmentation in their trading performance in the light of annualized return.
According to Boero and Marrocu (2002), the performance of linear models is better than non-linear
models if concentration is constrained to MSFE. Preminger, and Franck (2005) state that foreign
exchange rate forecasting robust models have a tendency for improving Autoregressive and Neural
Network model’s forecasting accuracy at each time sphere, as well as even of random walk for
predictions done at a one-month time - sphere. They also mention that robust models have considerable

5
market timing capability at each forecast horizons. Kamruzzaman and Sarker (2003) mention that
the performance of all ANN related models is better than the ARIMA model. Furthermore, they reveal
that all the ANN based models are capable to predict the foreign exchange market closely.
Bissoondeeal et al. (2008) conduct a research for forecasting foreign exchange rates with nonlinear
models and linear models and reveal that usually, NN models outperform compared to the time series
models which are traditionally applied in forecasting the foreign exchange rates. Philip, Taofiki and
Bidemi (2011) compare the performance of two models which are used to forecast the foreign
exchange rates, namely Hidden Markov Model and Artificial Neural Network Model and find that the
percentage of ANN model’s accuracy is more than Hidden Mark Model at 81.2% and 69.9%
respectively. Sosvilla-Rivero and García (2003) do a research for forecasting the USD/EUR
exchange rate and evaluate the empirical significance PPP’s expectation version for the study purpose.
They find that the behavior of the given study’s predictors is significantly better than the random walk
in forecasting the exchange rate up to a five-day period in terms of forecasts error as well as the
directional forecast. Dunis and Huang (2001) state that the majority trading strategies continue
positive returns after incorporating transaction costs. Furthermore, they mention that RNN models
come into view as the most excellent sole modeling approach up till now. They also reveal that the
model combination that has the most excellent overall performance as per forecasting accuracy, be
unsuccessful to upgrade volatility trading outcomes whose basis are RNN. Dunis, Laws, and
Sermpinis (2008b) mention that the HONN as well as the MPL networks outperform in predicting the
EUR/USD exchange rates fixed up by the ECB until the last part of the year 2007 comparison with the
performance of the RNN networks, the ARMA model, the MACD model and the naïve strategy.
Panda and Narasimhan (2003) state that NN outperforms the linear regression model in case of in-
sample forecasting. Though in case of out-of-sample forecasting, no model is nominated as a better
model between the NN and linear regression model, NN can improve the linear regression model
in respect of sign forecasting.
We submit that the current study is important for the following reasons. Exchange rate plays an
important role to develop the economy of the country. Exchange rate stability achieved through
stable macroeconomic variables gives credibility to the economy of a country to local and foreign
trade partners. Fluctuations in exchange rates may have a direct influence on trade balance, price
stability and financial stability (Ozkan & Erden, 2015). The findings of the study support the
literature and provide fresh insights into the relationship between exchange rate and macroeconomic

6
fundamentals which will assist central banks including the Bank of Bangladesh to monitor the effect
of these macroeconomic variables on exchange rate. The study will assist Policy makers to get
deeper understanding of the relation between macroeconomic variables exchange rate provides in
budgeting for the various sectors of the economy and also to ensure its (the
economy’s) efficient performance.

Objectives of the Study

Exchange rate is a key variable in the context of general economic policy making as its
appreciation or depreciation affects the performance of other macroeconomic variables in any
economy. In the light of its importance, every country pays so much attention to the
appropriateness of its foreign exchange policy. Therefore, the main objective of this study is to
find out the impact of some macroeconomic variables on exchange rate in Bangladesh using NZ
dollar as a benchmark currency.
The key objectives of the study are:
➢ To estimate fundamental forecasting model to forecast exchange rate between NZ dollar
and taka.
➢ To explore the major macro-economic variables.
➢ To study the effect these macro-economic variables on exchange
rate.
➢ To understand the determinants of stock
➢ To understand the determinants of stock market returns from these variables.

Methodology
The data collected for this research paper was from secondary sources. The defined stock market
index figures were gathered from their respective country’s stock exchange websites and the
macroeconomic variables were taken from reliable sources, such as, World Bank and Trading
Economics websites. Several other websites have been used to cross check the validity of the
figures, namely: CIA website (for exchange rate reserve); IMF website (for economic variables);
Bangladesh Bureau of Statistics website.

7
This research is in descriptive nature. Only secondary data related to the daily closing BDT/NZ
exchange rate is used for the study purpose. The yearly closing BDT/NZ exchange rate is
investigated in this study which is collected from data World Bank Archive. The study period is
from 2010 year to 2020 year.
Secondary Data
➢
Annual report of DSE
➢
World Bank Archive
➢
Working papers and business magazines
➢
Published and unpublished documents
➢
Spot exchange rate tools
➢
Various websites which is related to our research.

Statistical Methods
Statistical methods are mathematical formulas, models, and techniques that are utilized in the
measurable examination of crude research information. The requisition of statistical methods
extracts information from research data and provides distinct approaches to evaluate the strength
of research yields. In this study, the researcher employed the following statistical methods:
Regression analysis has been done based MS Excel.
Forecasting Exchange Rates:
At present time, MNC’s needs to forecast exchange rates to take decision regarding the operation
in subsidiaries. Numerous forecasting methods can be categorized into four:
1. Technical,
2. Fundamental,
3. Market-based, and
4. Mixed.
Fundamental Forecasting: Fundamental forecasting is based on fundamental relationships
between economic variables and exchange rates. A change in a currency’s spot rate is influenced
by the following factors:
e = f (ΔINF, Δ INT, ΔINC, ΔGC, ΔEXP)
Where,
e = percentage change in the spot rate
ΔINF= change in the differential between US inflation and the foreign country’s inflation

8
ΔINT = change in the differential between the US interest rate and the foreign country’s interest
rate.
ΔINC= change in the differential between the US income level and the foreign country’s income
level.
ΔGC = change in government controls.
ΔEXP= change in expectations of future exchange rates.
Usually, exchange rate is the price of one currency in terms of another currency. In freely floating
exchange rate system, equilibrium exchange rate is determined by market mechanism. In our
analysis, we will forecast how US dollar value in terms of taka will be changed based on
fundamental forecasting mode
We will use the following variables:
➢ Value of dollars in terms of taka denoted by EXR
➢ Export differential between Bangladesh and NZ in last years denoted by EXDt-1
Import differential between Bangladesh and NZ in last years denoted by INDt-1
➢ Real interest rate differential between Bangladesh and NZ in last years denoted by RIRDt-
1

Regression Analysis & Model:

Conditional expectation of dependable variable given independent variables is estimated through
regression analysis. For finding out the regression analysis, different techniques have been developed.
Linear regression and ordinary least squares regression are much familiar and parametric. Different
factors of following formulas have been used. These models are used when these are less expensive in
terms of money or less time consuming in terms of decision. Some examples of the usage of regression
models will be presented before describing the details of modeling process. The information going to
be used for making the prediction and the information going to be predicted have to be obtained from
the sample of objects or the individuals. Through a linear transformation, the relationship between two
parts of information is modeled.
This study investigates three important macroeconomic variables’ relationship and their influence on
exchange rates. Regression modeling technique is widely applied to estimate coefficients for
independent variables, to test hypotheses and to evaluate the importance of each independent
variable in the model. Following the same path this article also uses the following theoretical model
to assess the importance macroeconomic variables.

9
 – = 𝑎 + 𝛽1 X1 +𝛽2X2+μ
y = 𝑎 + 𝛽𝑖𝑥𝑖 +𝛽2x2i+ … + 𝛽𝑛 𝑥𝑛 +, 𝑖 = 1, …, 𝑛.

Where,
y = Exchange rate
a = Intercept
β = Regression coefficient to be estimated
x = Independent variable
i = List of independent variables
X1= Relative Change interest rates
X2=Relative Change inflation
When a country’s GDP is less the government will face a deficit in its budget which will lead for
higher tax rates to collect more revenue. If public resents the governments will borrow locally by
issuing bonds or from foreign financial institutions to bridge the gap. These actions will inflation.
These variables are closely linked and complementary and therefore a multi modeling technique
is adopted to clearly see the effect of these variables by linking them as follows.

Hypothesis
The individual hypothesis testing the research question is summarized in Figure 1: set up
hypothesis.
Independent Variable Null Hypothesis Alternate Hypothesis
1. Change Interest H : There is no significant
1 H A1: There is a significant
(ΔE) relationship between exchange relationship exchange rate and
rate and Change in export. Change in export.
2. Change in Inflation H : There is no significant
2 H A2: There is a significant
(ΔR) relationship between exchange relationship between exchange
rate and Change in inflation. rate and Change in inflation.

10
Data Analysis
We have completed our data analysis part (Using Excel) on the basis of yearly closing data of
Bangladesh and New Zealand from year 2010 to year 2020 from World Bank Archive. After we
took NZ exchange rate as a dependent variable (Y) followed by change in interest rate (Bangladesh
INT – NZ INT) as independent variable X1, Change in Inflation Rate (Bangladesh Inflation rate
– NZ Inflation) as independent variable X2. We have worked with numeric data of 2 countries,
Bangladesh and US.
Year EXR BD INT NZ INT BD INF NZ INF

2010 40.8224 4.736123572 3.085692803 7.144663025 3.074880091

2011 58.7019 5.064197684 3.571432485 7.859450855 2.449903384
2012 66.3309 5.343332657 5.974248881 8.164573678 -0.14193199
2013 64.0698 5.988693908 1.25315487 7.174953427 4.226944569
2014 64.3949 6.885866275 5.368747069 5.668788528 0.413234104
2015 54.5169 5.512644316 4.241004874 5.87277704 1.459593687
2016 54.7559 3.449253567 2.483507372 6.72785241 2.475838333
2017 57.7116 3.068636871 1.150761142 6.278692845 3.568177657
2018 58.0534 3.838585973 -1.995236875 5.597386853 2.035857045
2019 55.6301 4.879314996 0 4.458952023 3.659990973
2020 55.1937 4.040000073 0 4.089773091 -1.290750495

NZ EXR (Y) X1= (BD INT - NZ INT) X2 = (BD INF - NZ INF)

40.8224 1.650430769 4.069782934

58.7019 1.492765198 5.40954747
66.3309 -0.630916223 8.306505668
64.0698 4.735539038 2.948008858
64.3949 1.517119206 5.255554423
54.5169 1.271639443 4.413183354
54.7559 0.965746195 4.252014077
57.7116 1.917875729 2.710515189
58.0534 5.833822848 3.561529808
55.6301 4.879314996 0.79896105
55.1937 4.040000073 5.380523586

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 SUMMARY OUTPUT

Regression Statistics
Multiple R 0.38907696
R Square 0.151380881
Adjusted R Square -0.060773899
Standard Error 7.086251912
Observations 11

ANOVA
df SS MS F Significance F
Regression 2 71.6607546 35.8303773 0.713539808 0.518622374
Residual 8 401.7197293 50.2149662
Total 10 473.3804839

Standard Lower Upper Lower Upper

Coefficients t Stat P-value
Error 95% 95% 95.0% 95.0%

Intercept 46.6710955 9.843964128 4.7410875 0.001462 23.97087 69.37132 23.97087 69.371317

X
- -
Variable 1.04673038 1.483871673 0.7054049 0.500578 4.468545 4.4685446
2.375084 2.375084
1
X
Variable 1.86457545 1.567946078 1.1891834 0.268464 -1.751115 5.480266 -1.751115 5.4802656
2

Data interpretation
The interpretation of Regression analysis result.
We have the data. Now, we need to determine whether there is a statistically significant
relationship between the variables. Relationships, or correlations between variables, are crucial if
we want to use the value of one variable to predict the value of another. We also need to evaluate
the suitability of the regression model for making predictions.
In Data Analysis we have assumed that, there is no relation between independent Y and
independent variables X1, X2 and X3.
So, the null Hypothesis, Ho: μo = There is no relation between independent Y and independent
variables X1 and X2.

12
Alternative Hypothesis, H1: μo = there is a relation between independent Y and independent
variables X1 and X2 And Significance Alpha level is 5%.
In regression analysis we can see that, p value is greater than 0.5 it means there is a
statistical not significance difference and null hypothesis accepted. That means each
independent variable (Change in interest rate = x1, Change in Inflation = x2) has no
impact on dependent variable (Exchange rate = y).
Goodness-of-Fit Measures
Goodness-of-fit measures, like R-squared, assess the scatter of the data points around the fitted
value. The R-squared for our model is 15.14%, which is not good. For a given dataset, higher
R-squared values represent predictions that are more precise. However, R-squared doesn’t tell
us directly how precise the predictions are in the units of the dependent variable.
ANOVA table
ANOVA table examines the difference in the mean value of the dependent variable exchange
rate associated with the effect of the controlled independent variables. Results show that there
is a no significant relation between exchange rate independent variables. Because F calculated
value is less than the table value.

Findings and Analyzing

The purpose of the paper was to analyze the impacts of macroeconomic variables for exchange
rate forecast of selected two different countries. All the information is gathered from different
sources. All data are categorized with different variables. The literature review provides the
understanding of the impacts of major macroeconomic variables for exchange rate forecast based
on previous researches. The first objective of the paper was to determine the impact of major
macroeconomic variables of the chosen countries for exchange rate forecasting. It's found that
export, import and interest rate have significant impacts on exchange rate. Second objective was
to analyze the influences of the chosen independent variables on exchange rate. By conducting
unit root testing in Stata, no problem was found with the chosen independent variables. In order
to achieve the objectives, it was assumed that,

13
Ho (Null Hypothesis): There is a significant positive relationship between exchange rate and any
of change in export, change in import, and change in interest rate.
Ha (Alternative Hypothesis): There is a positive relationship between exchange rate and any of
change in export, change in import, and change in interest rate. With respect to period, this work
focuses on a 11-years period of 2010 - 2020 To determine the extent to which change in export,
change in import, and change in interest rate, a multiple regression analysis has been conducted.
The model is: EXR =β0 +β1CER +β2CIR +β3CIR + e
While running multiple regression model there may three problems be occurred -
Heteroscedasticity
Multicollinearity
Autocorrelation
Heteroscedasticity: In statistics, a collection of random variables is heteroskedastic if there are
sub-populations that have different variabilities from others. Here “variability” could be quantified
by the variance or any other measure of statistical dispersion. Thus, heteroscedasticity occurs due
to the absence of homoscedasticity
Multicollinearity: Multicollinearity is a statistical phenomenon in which two or more predictor
variables in a multiple regression model are highly correlated. Multicollinearity refers to a situation in
which two or more explanatory variables in a multiple regression model are highly linearly related.
More commonly, the issue of Multicollinearity arises when there is a strong linear relationship among
two or more independent variables. In the presence of high Multicollinearity, the confidence intervals
of the coefficients tend to become very wide and the statistics tend to be very small.
Autocorrelation: Autocorrelation is actually a mathematical representation of the degree of
similarity between a given time series and a lagged version of itself over successive time intervals.
It is the same as calculating the correlation between two different time series, except that the same
time series is used twice - once in its original form and once lagged one or more time periods. The
term can also be referred to as “lagged correlation” or “serial correlation”.

14
Limitation
In this assignment, we face some limitations. We have also found some difficulties during the
research period. We would like to explore those by point in below:
• We have studied so many publication and articles related with the exchange rate
forecasting but the evaluation method of these authors are not same.

• The data source is authentic but costly and time consuming.

• We couldn’t find any article that r directly related to our report.

• Among all difficulties the main them is that we had learnt a lot through the research
paper.

Conclusion
The main objective of this study is to find out the impact of some macroeconomic variables on
exchange rate in Bangladesh using NZ dollar as a benchmark currency. The objective of the paper was
to find out the impact of different macroeconomic variables on the exchange rate of two countries.
This paper found that there exist positive and negative relationship with these variables and exchange
rate. Real interest rate, inflation, FDI to GDP ratio and exchange rate negatively impact on the stock
market return where GDP growth rate, foreign currency reserve growth rate, fiscal deficit positively
impacts on the stock market return. The impact of foreign currency growth rate is significant on the
stock market returns. The impact of inflation is also significant at 5% level of significance. Findings
from the study have some crucial policy implications.

References
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Emerging Financial Markets: Evidence on India, Korea, Pakistan, and Philippines”
Applied Financial Economics 7: 25-35.

➢ Bernanke and Kuttner (2005) “What Explains the Stock Markets Reaction to Federal
Reserve Policy” Journal of finance, 60, 1221-1257 Business Standard. Bangladesh: An
Evaluation. International Journal of Applied Economics, 6(1), 22–29.

15
➢ Sun, Y. (2005), Exchange Rate Forecasting with An Artificial Neural Network Model: Can
We Beat a Random Walk Model? MCM Thesis, Lincoln University.

➢ Department of Economic Research, the Exchange Rate 2018

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