Posted: September 16th, 2016

Calculate the correlation between the spot exchange rate and all the other variables

In this Case Study, you will look at modelling the Australian dollar vis-á-vis the New Zealand dollar exchange rate, using a conventional monetary model. The data you will use is in the file called “The Monetary Model.xls”. This contains the following data: ‘S(AUD/NZD)’ , which is the Australian dollar per NZ dollar exchange rate; ‘Aust. MS’ , which is the level of the Australian money supply; ‘NZ MS’ , which is the level of the New Zealand money supply; ‘Aust. GDP’ , which is a measure of Australian gross domestic product (GDP); ‘NZ GDP’ , which is a measure of New Zealand gross domestic product (GDP); ‘Aust. IR’ , which is a measure of short-term Australian interest rates, and ‘NZ IR’ , which is a measure of short-term New Zealand interest rates. Data on these variables were collected from the IMF’s International Financial Statistics database, and from the Reserve Bank of Australia’s website.

To begin the empirical analysis, make sure you take the natural logarithm of S(AUD/NZD), Aust. MS, NZ MS, Aust. GDP, and NZ GDP. Leave the interest rate variables, Aust. IR and NZ IR, in their raw form. Also, use a level of significance of  = 0.05 for all tests in this study.

(a) Calculate the correlation between the spot exchange rate and all the other variables. Which variable has the strongest correlation with the exchange rate? I will call this variable “PREDICTOR” in the questions that follow. (4 marks)

(b) Calculate the mean, median and mode of the spot exchange rate. What is the difference between these types of “averages”? Compare the values of the mean and median. State what you think is the most appropriate average for this set of data, giving brief reasons for your answer. (4 marks)

(c) Draw a histogram of the spot exchange rate. Calculate the variance, measure of skewness and kurtosis. Using the descriptive statistics that you have calculated, do they indicate that the data is symmetric, and is this confirmed by the value of the skewness? Comment on the value of kurtosis. Based on these results, say why you believe that the spot exchange rate does, or does not, have a normal distribution. (6 marks)

(d) Write some brief notes, in point form, describing your results for Case Study One. Be sure to report any conclusions that you have made, and submit these. You will use them in a later tutorial when you write your final report. (2 marks)

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