Casullo Financial Services
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Transcript of Casullo Financial Services
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Casullo Financial ServicesCasullo Financial Services
Ya-Ling Chuang (Ambrosia) Ya-Ling Chuang (Ambrosia)
Udayan Shah Udayan Shah
Scott Holtorf Scott Holtorf
Supradipta DattaSupradipta Datta
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Casullo Financial ServicesCasullo Financial Services
Exchange Rate Projections Exchange Rate Projections
ForFor
Nike Inc.Nike Inc.
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Casullo Financial ServicesCasullo Financial Services
Four Models:Four Models:
1.1. The Purchase Power Parity Model (PPP)The Purchase Power Parity Model (PPP)
2.2. The Monetary (Asset) ApproachThe Monetary (Asset) Approach
3.3. Forward Exchange Rate ModelForward Exchange Rate Model
4.4. Ad-hoc ModelAd-hoc Model
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Casullo Financial ServicesCasullo Financial Services
The PPP ModelThe PPP Model
SSFFt+1t+1 = S = SFF
tt * [ 1 + s * [ 1 + sFFt+1t+1]]
MAE 0fMAE 0f εε = S = SFFt+1t+1 – S – St+1t+1
In –sample:In –sample:
ssFFtt= I= Id,td,t – I – Iff,,tt
where Iwhere Id,t+1d,t+1 = CPI = CPId,t+1d,t+1/CPI/CPId,td,t
SSFFtt = S = Stt
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Casullo Financial ServicesCasullo Financial Services
The PPP ModelThe PPP Model
SSFFt+1t+1 = S = SFF
tt * [ 1+ s * [ 1+ sFFt+1t+1]]
out-of-sample:out-of-sample:
Regress the equationRegress the equation
IIt+1t+1 = = αα00 + + αα11(I(Itt) + ) + εεtt
ssFFt+1t+1 = I = Id,t+1d,t+1 – I – If,t+1f,t+1
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Casullo Financial ServicesCasullo Financial ServicesThe Monetary (Asset) ApproachThe Monetary (Asset) Approach
SSFFt+1t+1 = S = SFF
tt * [ 1+ s * [ 1+ sFFt+1t+1]]
MAE 0fMAE 0f εε = S = SFFt+1t+1 – S – St+1t+1
In –sample:In –sample:
sst,Tt,T = y = yf,Tf,T – y – yd,Td,T +m +mSd,TSd,T – m – mSf,TSf,T
SSFFtt = S = Stt
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Casullo Financial ServicesCasullo Financial ServicesThe Monetary (Asset) ApproachThe Monetary (Asset) Approach
SSFFt+1t+1 = S = SFF
tt * [ 1+ s * [ 1+ sFFt+1t+1]]
MAE of MAE of εε = S = SFFt+1t+1 – S – St+1t+1
out-of-sample:out-of-sample:
After Regression AnalysisAfter Regression Analysis
ssFFt+1t+1 = = αα00 + + αα11(y(yf,tf,t – y – yd,td,t) + ) + αα22(m(md,td,t – m – mf,tf,t))
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Casullo Financial ServicesCasullo Financial Services
Expectation HypothesisExpectation Hypothesis
SSFFt+1t+1 = S = SFF
tt * [1 + s * [1 + sFFtt]]
MAE of MAE of εε = S = SFFtt – S – Stt
in-sample:in-sample:
ssFFtt = (i = (id,td,t – i – if,tf,t) * T/360) * T/360
SSFFtt = S = Stt
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Casullo Financial ServicesCasullo Financial Services
Expectation HypothesisExpectation Hypothesis
SSFFt+1t+1 = S = SFF
tt * [1 + s * [1 + sFFtt]]
MAE of MAE of εε = S = SFFtt – S – Stt
out-of-sample:out-of-sample:
ssFFtt = (i = (id,td,t – i – if,tf,t) * T/360) * T/360
Use of random walk in estimating (iUse of random walk in estimating (id,td,t – i – if,tf,t))
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Casullo Financial ServicesCasullo Financial Services
Ad-hoc ModelAd-hoc Model
SSFFt+1t+1 = S = SFF
tt * [1 + s * [1 + sFFt+1t+1]]
MAE of MAE of εε = S = SFFtt – S – Stt
in-sample:in-sample:
ssFFtt = = αα + ß + ß11(I(Id,td,t – I – If,tf,t) + ß) + ß22 [(i [(id,td,t – i – if,tf,t) * T/360] ) * T/360]
+ ß+ ß3 3 (y(yd,td,t – y – yf,tf,t) + ) + εεtt
SSFFtt = S = Stt
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Casullo Financial ServicesCasullo Financial ServicesAd-hoc ModelAd-hoc Model
SSFFt+1t+1 = S = SFF
tt * [1 + s * [1 + sFFt+1t+1]]
MAE of MAE of εε = S = SFFtt – S – Stt
out-of-sample:out-of-sample:
Random Walk used in estimating (IRandom Walk used in estimating (Id,td,t – I – If,tf,t), (i), (id,td,t – i – if,tf,t) and ) and (y(yd,td,t – y – yf,tf,t).).
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Casullo Financial ServicesCasullo Financial Services
USD/GBPUSD/GBP In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 0.06660.0666 1.64591.6459
MAAMAA 0.09520.0952 0.03480.0348
FWD EXFWD EX 0.06650.0665 0.06660.0666
AD HOCAD HOC 0.06060.0606 0.14260.1426
Random WalkRandom Walk 0.06300.0630 0.02980.0298
RSQRSQ t-statst-stats
0.08510.0851 -0.39, -2.29, -0.79-0.39, -2.29, -0.79
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Casullo Financial ServicesCasullo Financial ServicesUS-UK Exchange Rate Forecast Comparison
1
1.2
1.4
1.6
1.8
2
2.2
2.4
1980.0
1984.0
1988.0
1992.0
1996.0
2000.0
Time
US
D/G
BP
PPP (IS)
PPP (OS)
MAA (IS)
MAA (OS)
Ad Hoc (IS)
Ad Hoc (OS)
FWD EX (IS)
FWD EX (OS)
Actual
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Casullo Financial ServicesCasullo Financial Services
USD/DEMUSD/DEM In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 0.12950.1295 0.20320.2032
MAAMAA 0.03300.0330 0.02760.0276
FWD EXFWD EX 0.02410.0241 0.11020.1102
AD HOCAD HOC 0.02280.0228 0.11580.1158
Random WalkRandom Walk 0.02340.0234 0.01810.0181
RSQRSQ t-statst-stats
0.04640.0464 1.31, -1.57, .0341.31, -1.57, .034
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Casullo Financial ServicesCasullo Financial ServicesUS-GRM Exchange Rate Forecast Comparison
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1980.0
1984.0
1988.0
1992.0
1996.0
2000.0
Time
US
D/D
EM
PPP (IS)
PPP (OS)
MAA (IS)
MAA (OS)
Ad Hoc (IS)
Ad Hoc (OS)
FWD EX (IS)
FWD EX (OS)
Actual
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Casullo Financial ServicesCasullo Financial Services
USD/JPYUSD/JPY In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 0.00190.0019 0.00160.0016
MAAMAA 0.00040.0004 0.00050.0005
FWD EXFWD EX 0.00030.0003 0.00040.0004
AD HOCAD HOC 0.00030.0003 0.00030.0003
Random WalkRandom Walk 0.00030.0003 0.00030.0003
RSQRSQ t-statst-stats
0.16450.1645 -.133, -3.28, 1.48-.133, -3.28, 1.48
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Casullo Financial ServicesCasullo Financial Services
US-JAP Exchange Rate Forecast Comparison
0
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
0.009
0.01
0.011
0.012
0.013
0.014
0.015
1980.0
1984.0
1988.0
1992.0
1996.0
2000.0
Time
US
D/J
PY
PPP (IS)
PPP (OS)
MAA (IS)
MAA (OS)
Ad Hoc (IS)
Ad Hoc (OS)
FWD EX (IS)
FWD EX (OS)
Actual
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Casullo Financial ServicesCasullo Financial Services
USD/MXPUSD/MXP In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 2.87192.8719 0.04370.0437
MAAMAA 1.33341.3334 0.01140.0114
FWD EXFWD EX 0.40850.4085 0.03800.0380
AD HOCAD HOC 0.34310.3431 0.08160.0816
Random WalkRandom Walk 0.58280.5828 0.00190.0019
RSQRSQ t-statst-stats
0.48390.4839 2.97, .97, -.082.97, .97, -.08
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Casullo Financial ServicesCasullo Financial Services
US-MEX Exchange Rate Forecast Comparison
0
5
10
15
20
25
30
35
40
45
50
55
1980.0
1981.0
1982.0
1983.0
1984.0
1985.0
1986.0
1987.0
Time
US
D/M
XP
PPP (IS)
MAA (IS)
Ad Hoc (IS)
FWD EX (IS)
Actual
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Casullo Financial ServicesCasullo Financial Services
US-MEX Exchange Rate Forecast Comparison
0
0.2
0.4
0.6
0.8
1
1987.0
1991.0
1995.0
1999.0
2003.0
Time
US
D/M
XP
PPP (IS)
PPP (OS)
MAA (IS)
MAA (OS)
Ad Hoc (IS)
Ad Hoc (OS)
FWD EX (IS)
FWD EX (OS)
Actual
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Casullo Financial ServicesCasullo Financial Services
USD/KRWUSD/KRW In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 1.69171E-41.69171E-4 2.0495E-42.0495E-4
MAAMAA 1.2164E-41.2164E-4 5.9246E-55.9246E-5
FWD EXFWD EX 7.700E-57.700E-5 1.1752E-41.1752E-4
AD HOCAD HOC 3.786E-53.786E-5 1.1752E-41.1752E-4
Random WalkRandom Walk 3.824E-53.824E-5 2.198E-52.198E-5
RSQRSQ t-statst-stats
0.41870.4187 3.48, 1.80, .843.48, 1.80, .84
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Casullo Financial ServicesCasullo Financial Services
US-KOR Exchange Rate Forecast Comparison
0
0.0001
0.0002
0.0003
0.0004
0.0005
0.0006
0.0007
0.0008
0.0009
0.001
0.0011
0.0012
0.0013
0.0014
0.0015
0.0016
0.0017
0.0018
0.0019
0.002
1990.0
1994.0
1998.0
2002.0
Time
US
D/K
RW
PPP (IS)
PPP (OS)
MAA (IS)
MAA (OS)
Ad Hoc (IS)
Ad Hoc (OS)
FWD EX (IS)
FWD EX (OS)
Actual
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Casullo Financial ServicesCasullo Financial Services
GBPGBP DEMDEM JPYJPY MXPMXP KRWKRW
11 -0.252-0.252 1.5451.545 -0.138-0.138 0.6230.623 3.2733.273
22 -1.975-1.975 -1.611-1.611 -3.408-3.408 0.2540.254 2.2142.214
33 -0.196-0.196 0.0140.014 0.6740.674 -0.003-0.003 0.0740.074
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Casullo Financial ServicesCasullo Financial Services
USD/DEMUSD/DEM In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 0.12950.1295 0.20320.2032
MAAMAA 0.03300.0330 0.02760.0276
FWD EXFWD EX 0.02410.0241 0.11020.1102
AD HOCAD HOC 0.02280.0228 0.11580.1158
Random WalkRandom Walk 0.02340.0234 0.01810.0181
RSQRSQ t-statst-stats
0.04640.0464 1.31, -1.57, .0341.31, -1.57, .034
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Casullo Financial ServicesCasullo Financial Services
US-GRM Exchange Rate Forecast Comparison
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1980.0
1984.0
1988.0
1992.0
1996.0
2000.0
Time
US
D/D
EM MAA (IS)
MAA (OS)
Actual
FORECAST
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Casullo Financial ServicesCasullo Financial Services
USD/JPYUSD/JPY In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE
PPPPPP 0.00190.0019 0.00160.0016
MAAMAA 0.00040.0004 0.00050.0005
FWD EXFWD EX 0.00030.0003 0.00040.0004
AD HOCAD HOC 0.00030.0003 0.00030.0003
Random WalkRandom Walk 0.00030.0003 0.00030.0003
RSQRSQ t-statst-stats
0.16450.1645 -.133, -3.28, 1.48-.133, -3.28, 1.48
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Casullo Financial ServicesCasullo Financial Services
US-JAP Exchange Rate Forecast Comparison
0
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
0.009
0.01
0.011
0.012
0.013
0.014
0.015
1980.0
1984.0
1988.0
1992.0
1996.0
2000.0
Time
US
D/J
PY Ad Hoc (IS)
Ad Hoc (OS)
Actual
FORECAST