A Study of the USDX Based on ARIMA Model
——A Correlation analysis between the USDX and the Shanghai index
Weiqing WANG, Ya LV
Dongling School of Economics and Management,
University of Science and Technology Beijing
Beijing, 100083, China
wangwq@manage.ustb.edu.cn; lvya1005@126.com
AbstractüIn order to predict and describe the volatility of the
U.S. dollar index, the ARIMA model is used to study the U.S.
dollar index. After establishing the time series model, we use
the model to predict future trends of the U.S. dollar index the
results show that ARIMA model is a proper short- term
forecasting method. It is effective when predicting for a month.
Then in order to get further analysis of USDX, we study the
correlation between the Shanghai index and the U.S. Dollar
Index, and found there is a strong negative relationship between
them.
Keywords- Dollar Index; ARIMA; Shanghai Index;
Correlation
I. INTRODUCTION
The U.S. Dollar Index (USDX) reflects the changes of
exchange rate between the U.S. dollar and other major
currencies in the international foreign exchange market. It is an
important indicator of the comprehensive strength of the U.S.
dollar. Therefore, the study of the dollar index and its trend of
the volatile characteristics have important theoretical and
practical value for China's foreign exchange reserves
investment strategy especially when we make investment
portfolios decisions within the assets denominated in U.S.
dollar and other major foreign currencies. In recent years, the
value of U.S dollar also has affection on the trend of the
China’s stock market.
The volatility of the U.S. Dollar Index (USDX) has a large
effects on varies aspects. Especially after the 2008 global
financial crisis, the USDX goes up and down without normal
characteristics. Foreign researches mostly focused on the
analysis of the exchange rate of U.S. dollar against other major
currencies. S.C. Bae [1] and M. Joy [2] discovered the
negative correlation between USDX and gold prices. K.
Heimonen [3] examined equity flows between the US and the
euro area and their impact on the euro–dollar. Most foreign
scholars made good use of time series model. Jurgen A.
Doornik & O. Marius [4] analyzed the multimodality in
GARCH regression models. B. Luc et al. [5] used asymmetric
GARCH models to improve the Bayesian option price. Axel
Grossmann & Mac W. Simpson [6] forecasted the USD/JPY
exchange rate based on a capital enhanced relative PPP-based
model. Robert Johnson & Luc Soenen [7] compared the US
stock market and the international value of the US dollar. L.
Marquez et al. [8] and Jun-song Jia et al. [9] put up the
hybridization of intelligent techniques and ARIMA models for
time series prediction. On the other hand, some scholars paid
attention to the analysis of the U.S. dollar and other economic
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49
variables. Yue-Jun Zhang [10] analyzed the spillover effect of
US dollar exchange rate against euro on oil prices; Young
Wook Han [11] and M. Gade [12] did a study of the intraday
effects of macroeconomic shocks on the US Dollar–Euro
exchange rates Also, Min-Hsien Chiang et al. [13] made a
study on the Stock market momentum based on GARCH
option pricing models.
Many studies in China have also paid attention to the
analysis of the USDX. The relationship of gold prices and the
U.S. dollar index is an important aspect in this area. Many
scholars did some theoretical studies from the Macro
perspective. For example, Fengmei Yang [14] studied the
relationship between the price of gold and the USDX index,
and the result shows that there is a negative correlation
between the gold price and the USDX. Yang Zhao [15]
examined the relationship between USDX and China's stock
market, and the result shows that there exist a definite link
between the USDX and the China's stock market. Also, there
were empirical studies on the ARIMA model and GARCH
model. Yuan Guo [16] found that GARCH model can be used
to predict the USD/CNY exchange rate; Ni Yang et al. [17]
studied the characteristics of the U.S. Dollar exchange rate
time series data and did an in-depth analysis of its multi-fractal
and nonlinear features.
In this paper, we mainly focus on the analysis of the
volatile characteristics of the U.S. Dollar Index itself instead
of studying its relationship with other economic variables.
And then we use the ARIMA model to predict the USDX
respectively. Considering the Fluctuations in the dollar index
has a significant impact on China's stock market, we try to use
the classical model of a linear regression method in one of the
Econometric models to describe the dynamic relationship
between the U.S. dollar index data and Shanghai index data,
and found that there has an important negative correlation
between them
II. FORECAST OF THE USDX BASED ON ARIMA
We use the single integer autoregressive moving average
time series model to describe the volatile characteristics of the
USDX. We choose weekly U.S. dollar index closing points as
the sample data from January 6, 2001 to March 20, 2011,
almost 10 years (535 weeks). All data come from the Great
Wisdom Securities Harbor Software.
The model-building are divided into three steps-- model
identification, model determination and model inspection. (1).
Smoothing the time series. According to the time series plot
and the ADF unit root test, whether the time series is stationary series is stable. The test result is shown in Figure-2. T test
or not is determined. (2). Identification of ARIMA model and statistic value is -1.196840, which is larger than the 10%
determining the p, q values. By examining the autocorrelation threshold significance, so there is unit root series, the time
function (ACF) and partial autocorrelation function (PACF), series is unstable.
the type of sequence is identified. Table-1 is a summary of the
ARMA series model features. Then we use the autocorrelation By using the Eviews software, the USDX time series is
function and partial autocorrelation function to identify the transformed into a stable series by twice differential operation
model, determining the p, q according to the minimum AIC and the Fig-3 shows the result of the unit root test.
principle. (3). Estimate the parameters and check whether it Secondly, we use the ACF and the PACF to choose the (p,
could pass the white noise test or not. q) parameters. The autocorrelation function and partial
autocorrelation function of the time series are shown in Fig-
TABLE I. SUMMARY OF ARMA MODEL FEATURES
Type ACF PACF
AR(p) Tailing q-step Censored
MA(q) q-step Censored Tailing
ARMA(p, q) Tailing Tailing

Figure 2. ADF test results of USDX time series

Figure 1. USDX historical data chart

Firstly, the stability of the time series data can be simply

judged by a picture. The line of the historical USDX data is
shown in Fig-1, the horizontal axis is the year and the vertical Figure 3. Result of the unit root test
axis is the USDX.
It can be seen that the USDX is not a purely random
sequence; there is a clear trend in it, showing it is not a stable
series. Further more, we take an accurate statistical test to
finally check whether it is stable. ADF test is a good way
which is done by the following three models:
m
ΔX t = δ X t −1 + ¦ βi ΔX t −i + ε t (1)
i =1
m
ΔX t = α + δ X t −1 + ¦ β i ΔX t −i + ε t (2)
i =1
m
ΔX t = α + β t + δ X t −1 + ¦ β i ΔX t −i + ε t (3)
i =1

In which “t” is the time variable, “Į” is the intercept, “ȕt” is

the lag order of the parameters, “ȟ” is the parameters of the
first order lag, “İt” is a random error term.
As long as there is a model in which the test results
rejected the null hypothesis, it is turn out to be that the time
Figure 4. the correlation functions
According to Fig-4, the p can be 7, and the q can be 2.
Then there are four different models we can choose from, and

50
its AIC (Akaike Information Criterion), SC (Schwarz Criterion) Figure 5. The predictions of USDX
is shown respectively in table-2:
As we can see in the Fig-5, the fluctuation of the USDX
According to the minimum AIC and SC principle, ARIMA falls firstly, and then regularly fluctuates within a certain range.
(1, 2) model is the best one. The model passed the white noise There is a strong description of USDX. Then we expand the
test. prediction interval to a longer period, up to a six-month, we
Finally, we use the ARIMA (1, 2) model to forecast the find the predicted results are poor. So the ARIMA model is
USDX in April in the year of 2011. the result is shown in ineffective for long-term forecasts.
Fig-5. III. A CORRELATION ANALYSIS BETWEEN THE
USDX AND THE SHANGHAI INDEX
TABLE II. ARMA MODELS AND THE VALUE OF AIC AND SC
Most of the researchers analyze the trend of the Shanghai
ARMA model AIC SC
p=1, q=1 -5.991844 -5.967693 index from a macroeconomic perspective or a policy
p=1, q=2 -6.006240 -5.982088 perspective, for example Caoyong[18] and Liuling [19]made
p=2, q=1 -5.991908 -5.967722 an empirical study between macroeconomic factors and the
p=2, q=2 -5.311106 -5.286919 Shanghai A-share index. Through an observation of the dollar
index and the Shanghai index within the past three years, a
close relation ship can be found between them. In this paper,
we study from a new perspective on the correlation between
the Shanghai index and the USDX, which contribute to a better
understanding of the characteristics of dollar index.
We select data of dollar index and Shanghai index from
2008 to 2010 in months, the curves of the two data are shown
in figure 6 separately, we can see there is a negative
correlation between them, with the help of Eviews software,
we use the classic method of a linear regression analysis to
determine the accurate relationship between the two data.

Figure 6. Curves of the USDX and the Shanghai index

We use single-equation econometric model to analyze the index goes down, the Shanghai index rose within a certain
relationship, the linear regression model is the simplest model, range
there is only one explanatory variable in the model, The
general form of which is Yt = β 0 + β1 X i + μi , i = 1, 2," , n , in which
Yt is a variable to be explained, X t is the explanatory
variable, β 0 and β i are the estimated parameters, μi is the
Random Distracter. The main purpose to regression analysis is
to estimate as accurately as possible by the sample regression
model. There are a variety of estimation methods, in this paper
we use the most widely used ordinary least squares estimation.
First we can see from scatter plot showed in figure 7 here is
some negative correlation between the declines, as the dollar
Figure 7. Scatter plot of the USDX and the Shanghai index

51
 The main advantage of a regression model lies in it
determine whether the variables are significant by the
statistical test parameter estimates and the true value of the
difference, Mainly composed of the goodness of fit test and
test of significance of variables. The result of the regression
between the U.S. dollar index and the Shanghai Composite
Index is shown in Figure 8.
Figure 8. The results of a regression
We can see from the figure that the coefficient of
determinationR2: R-squared=0.543211, which is not high
enough, it means the regression model for the fit of the sample
observations are biased to some extend. Another important test
is test of significance of variables, which can be used to
determine whether the linear relationship between the
explained variable and explanatory variable is significant.
Through direct observation of the model output shown in
Figure 9, the P values of t test and F test are less than
significant level of 0.05, indicating that the model variables
pass the significance test
Figure 9. Model output
Through a linear regression modeling after a few simple
steps, we get a simple model, although the variables are all
pass the significance test the overall goodness of fit is not very
satisfactory. We need to analyze the characters of the data
further in order to establish a more comprehensive regression
equation.
At the same time, it is meaningful trying to establish a
linear regression model between the USDX and the Shanghai
index that for every dollar index rose a point, the Shanghai
index will be a corresponding decline in certain points, which
has an important reference to study the trend of the domestic
Shanghai index.
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IV. CONCLUTIONS
The weekly closed point of the US dollar index shows an
identified downward trend in the last decade. According to this
trend, this paper establishes ARIMA model to describe the
volatility of the USDX time series. There are some rules about
dollar index volatility. (1)Although the dollar index shows a
downward overall trend, according to the segment
observations, the fluctuations are rather frequent. The violent
fluctuations can not be accurately described by time series
model, because the model is based on the data which is
smoothed. (2)The trend of the USDX is influenced by
historical factors, but the sphere of influence is limited. This
can be seen in the forecasting process of ARIMA model. It has
a good reflection on short-term prediction, but it is not very
accurate for long-term prediction. Analysts should pay
attention to large fluctuations in the USDX cycle and the
changes in current trends. (3)The ARIMA model of USDX in
this paper is established in a new angle to describe the volatile
characteristics of the USDX. However, for more accurate
prediction of the USDX, a variety of economic factors and
political factors should be taken into account.
We can also conclude the reasons why U.S. dollar index
and the Shanghai index are negatively related. (1)The selected
data are from year 2008 to year 2010, in which period
happened the global economic crisis, during this time the
government of our country use the monetary and fiscal policies
to boost the stock market. (2)The changes in the dollar has an
affect on foreign reserves in China, Which led to the actual
amount invested RMB in China, then the stock market will be
affected, too.(3)The impact of exchange rate of Dollar on
China's stock market is not identified. In different time periods,
the positive or negative correlation between the U.S. Dollar
and Shanghai Index is uncertain.
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