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Monthly XAF-USD Exchange Rates Modeling by SARIMA Techniques

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Euro-Asian Journal of Economics and Finance http://www.absronline.org/journals
ISSN: 2310-0184 (print)
ISSN: 2310-4929 (online)
Volume: 2, Issue: 1 (January 2014), Pages: 1-12
© Academy of Business & Scientific Research

Monthly XAF-USD Exchange Rates Modeling by SARIMA Techniques

Ette Harrison Etuk1* and Bob William Nkombou2

1. Lecturer, Department of Mathematics/Computer Science, Rivers State University of Science and Technology,
Port Harcourt, Nigeria.
2. Postgraduate Student, Department of Mathematics/Computer Science, Rivers State University of Science and
Technology, Port Harcourt, Nigeria.

The monthly exchange rates between the Central African Franc (XAF) and the US
Dollar (USD) are herein modeled by SARIMA techniques. The realization from January
1997 to March 2013 (referred to as XDER herein) is analyzed in this work. The time plot
of XDER in Figure 1 shows an overall upward secular trend with no obvious regular
seasonal component. As expected, XDER is shown to be non-stationary by the
Augmented Dickey Fuller (ADF) test. Seasonal (i.e. 12-monthly) differencing of XDER
yields the series SDXDER which shows an overall horizontal trend, yet with no definite
seasonal movement (See figure 2). The ADF test certifies SDXDER as stationary. Its
correlogram in Figure 4 suggests an ARMA(1, 5) model fit. A non-seasonal differencing
of SDXDER yields the series DSDXDER which exhibits an overall horizontal trend. No
seasonal component is discernible from the visual inspection of its time plot of Figure 3.
However its correlogram in Figure 5 has a significant negative spike at lag 12 and
comparable spikes at lags 11 and 13, an indication of a 12 monthly seasonality and the
presence of a seasonal moving average component of order one. Moreover this is the
autocorrelation structure of a (0, 1, 1)x(0, 1, 1)12 SARIMA model. Hence the two models,
(1, 0, 5)x(0, 1, 0)12 and (0, 1, 1)x(0, 1, 1)12 , are proposed and fitted. The latter has been
shown to be the more adequate.

Keywords: Time Series, Foreign exchange rates, XAF, USD, SARIMA models, finance,
economics, Central Africa, US, Seasonal Series.

INTRODUCTION
Many economic and financial time series exhibit
seasonality as well as volatility. Interest here is in
seasonality. Oil prices, inflation rates, crude oil
production, aviation traffic data, energy
consumption rates, are a few such time series.
Foreign exchange rates are also known to exhibit
seasonality. A few researchers that have
established this fact are Appiah and Adetunde
(2011), Onasanya and Adeniji (2013), Oyediran
and Afieroho (2013), Etuk(2012, 2013, 2014), etc.
Such seasonal series could be modelled by
seasonal autoregressive integrated moving
average (SARIMA) models. In this write-up
interest is in the use of SARIMA methods to model
monthly XAF-USD exchange rates. The references
cited above are a few works where SARIMA
techniques are applied in the modelling of foreign
exchange rates. Etuk(2014) has demonstrated that

*Corresponding author: Ette Harrison Etuk

Department of Mathematics/Computer Science,
Rivers State University of Science and Technology, Port Harcourt, Nigeria
E-Mail: ettetuk@yahoo.com
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 Monthly XAF-USD Exchange Rates Modelling
for seasonal series, SARIMA methods are likely to
outdo just autoregressive integrated moving
average (ARIMA) methods.
There seems to be a renewed interest in the use of
SARIMA methods of recent. A few of researchers
who have recently applied SARIMA methods in
modelling seasonal series include Luo et al. (2013),
Ismail and Mahpol (2005), Arumugam and
Anithakumari (2013), Osabuohien-Irabor (2013),
Linlin and Xiaorong (2012) and San-Juan et al.
(2012).
MATERIALS AND METHODS
The data for this work are monthly XAF-USD
exchange rates from January 1997 to March 2013
obtainable from the website www.fxtop.com. It is to
be interpreted as the amount of USD per XAF.
Sarima Models
A stationary time series {Xt} is said to follow an
autoregressive moving average model of orders p and q,
designated ARMA(p, q), if it satisfies the
following difference equation
Xt - 1Xt-1 - 2Xt-2 - … - pXt-p = t + 1t-1 + 2t-2 +
… + qt-q
(1)
where {t} is a white noise process and the ’s and
’s are constants such that the model is stationary
as well as invertible. Model (1) may be written as
A(L)Xt = B(L)t (2)
where the autoregressive(AR) operator A(L) = 1 -
1L - 2L2 - … - pLp and the moving average(MA)
operator B(L) = 1 + 1L + 2L2 + … + qLq and L is
the backshift operator defined by LkXt = Xt-k. For
model stationarity and invertibility the zeros of
A(L) and B(L) must be outside the unit circle,
respectively.
Many real life time series are not stationary.
Suppose the series {Xt} is non-stationary. Box and
Jenkins(1976) proposed that differencing the series
to an appropriate order can make it stationary.
Suppose d is the minimum degree of differencing
necessary for stationarity. Then let dXt be the dth
difference of Xt. Then  = 1 - L. If {dXt} satisfies
(1) then {Xt} is said to follow an autoregressive
Etuk and Nkombou
integrated moving average model of orders p, d and q
designated ARIMA(p, d, q).
Suppose that the series {Xt} is seasonal of period s,
Box and Jenkins(1976) proposed that {Xt} may be
modelled by
A(L)(Ls)dDsXt = B(L)(Ls)t (3)
where (L) is the seasonal AR operator and (L)
is the seasonal MA operator; s is the seasonal
difference operator defined by s = 1 – Ls.
Suppose (L) and (L) are respectively
polynomials of orders P and Q and their
coefficients are such that the model is stationary
as well as invertible. Then {Xt} is said to follow a
multiplicative seasonal autoregressive integrated
moving average model of orders p, d, q, P, D, Q and s,
designated (p, d, q)x(P, D, Q)s SARIMA model.
Model Estimation
Model estimation invariably starts with
determination of the orders p, d, q, P, D, Q and s.
Seldom is it possible to determine the period of a
seasonal series from the time plot. The
correlogram could better indicate seasonality by a
significant spike at the ‘seasonal’ lag. The
autoregressive orders p and P could be estimated
by the non-seasonal and the seasonal cut-off lags
of the partial autocorrelation function (PACF)
respectively. Similarly, the moving average orders
q and Q could be estimated on the autocorrelation
function(ACF) respectively. Customarily, the
differencing orders d and D must sum up to at
most 2. Often d = D = 1.
After order determination, parameter estimation
usually involves the application of non-linear
optimization techniques since the model consists
of items of a white noise process. Traditionally
such techniques include the least squares
procedure, the maximum likelihood principle, the
maximum entropy method, etc.
All the analytical work of this write-up was done
using the Eviews software. This statistical and
econometric software is based on the least squares
principle.
RESULTS
The time plot of the series XDER in Figure 1
reveals an overall upward trend with no
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Euro-Asian j. econ. financ.
ISSN: 2310-0184 (print); 2310-4929 (online)
Volume: 2, Issue: 1, Pages: 1-12
discernible regular seasonal movement. Seasonal
(i.e. 12-point) differencing yields the series
SDXDER which exhibits an overall horizontal
trend, still with no regular seasonality (See Figure
2). Non-seasonal differencing of SDXDER
produces the series DSDXDER. DSDXDER is
observed to follow an overall horizontal trend.
The time plot of Figure 3 does not reveal any
regular seasonal component. With the test statistic
of -1.5 for XDER, -3.8 for SDXDER and -5.4 for
DSDXDER and the 1%, 5% and 10% critical values
of -3.5, -2.9 and -2.6 respectively, the ADF test
adjudges XDER as non-stationary and both
SDXDER and DSDXDER as stationary.
[Figure 1, Figure 2, Figure 3, Figure 4, Figure 5,
Table 1, Table 2]
The correlogram of SDXDER in Figure 4 is such
that the ACF cuts off at lag 5 and the PACF at lag
1. This suggests an ARMA(1, 5) model for
SDXDER. That is, XDER follows an (5, 0, 1)x(0, 1,
0)12 model. The estimation of the model as
summarized in Table 1 yields
SDXDERt -.7183SDXDERt-1 = t + .4737t-1 + .2788t-
2 + .2678t-3 + .1818t-4 + .2176t-5
The coefficients are all statistically significant and
as much as 87% of the variation in SDXDER is
explained by the model. The correlogram of the
residuals in Figure 6 shows that they are
correlated. In fact, they are seasonal of period 12
months and there is a seasonal moving average
component of order one. This invalidates the
model.
[Figure 6]
On the other hand, the correlogram of DSDXDER
reveals a significant negative spike at lag 12 and
comparative spikes at lags 11 and 13 (See Figure
5). This is indicative of a seasonal movement of
period 12 months, the presence of a seasonal
noving average component of order one and the
autocorreelation structure of a (0, 1, 1)x(0, 1, 1)12
SARIMA model. A summary of the estimation of
the model in table 2 yields
DSDXDERt = t + .2363t-1 - .8630t-12 -.1867t-13
All the coefficients are statiistically significant and
55% of the variation in DSDXDER is explained by
the model. The correlogram of the residuals in
Figure 7 shows that the residuals are uncorrelated.
This shows that the model is adequate.
[Figure 7]
CONCLUSION
Monthly XAF-USD exchange rates follow a
multiplicative (0, 1, 1)x(0, 1, 1)12 SARIMA model.
This has been shown to be adequate.
REFERENCES
Appiah, S. T., & Adetunde, I. A. (2011).
Forecasting Exchange rate between the Ghana
Cedi and the US Dollar using Time Series
Analysis. Current Research Journal of Economic
Theory, 5(2), 76-83.
Box, G. E. P., & Jenkins, G. M. (1976). Time Series
Analysis, Forecasting and Control. San Francisco,
Holden-Day.
Arumugam, P., & Anithakumari, V. (2013).
SARIMA model for Natural Rubber
production in India. International Journal of
Computer Trends and Technology (IJCTT), 4(8),
2480-2484.
Etuk, E. H. (2012). A seasonal ARIMA Model for
Daily Nigerian naira-US dollar Exchange
Rates. Asian Journal of Empirical Research, 2,
219-227.
Etuk, E. H. (2013). The Fitting of a SARIMA model
to Monthly Naira-Euro Exchange Rates.
Mathematical Theory and Modelling, 3(1), 17-26.
Etuk, E. H. (2014). Modelling of Daily Nigerian
Naira-British Pound Exchange Rates using
SARIMA Methods, British. Journal of Applied
Science and Technology, 4(1), 222-234.
Ismail, Z., & Mahpol, K. A. (2005). SARIMA model
for forecasting Malaysian electricity generated.
Matematika, 21(2), 143-152.
Linlin, Y., & Xiaorong, C. (2012). The study of
Expressway traffic Flow based on SARIMA.
Model, Advances in Biomedical Engineering, 8,
223-229.
Luo, C. S., Zhuo, L., & Wei, Q. F. (2013).
Application of SARIMA Model in Cucumber
Price Forecast. Application of SARIMA Model in
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 Monthly XAF-USD Exchange Rates Modelling Etuk and Nkombou

Cucumber Price Forecast, Applied Mechanics and

Materials, Vol, 373-375.
Onasanya, O. K., & Adeniji, O. E. (2013).
Forecasting of Exchange Rate between naira
and US dollar using Time Domain model.
International Journal of development and Economic
Sustainability, 1(1), 45-55.
Osabuohien-Irabor, O. (2013). Applicability of
Box-Jenkins SARIMA Model in Rainfall
Forecasting: A Case Study of Port-Harcourt
south south Nigeria. Canadian Journal on
Computing in Mathematics, Natural Sciences,
Engineering and Medicine, 4(1), 1-4.
San-Juan, J. F., San-Martin, M., & Perez, I. (2012).
An Econometric Hybrid J2 Analytical Orbit
Propagator Program based on. SARIMA
Models, Mathematical Problems in Engineering,
2012, 1-15.

APPENDIX

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Euro-Asian j. econ. financ.
ISSN: 2310-0184 (print); 2310-4929 (online)
Volume: 2, Issue: 1, Pages: 1-12

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Monthly XAF-USD Exchange Rates Modelling Etuk and Nkombou

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Euro-Asian j. econ. financ.
ISSN: 2310-0184 (print); 2310-4929 (online)
Volume: 2, Issue: 1, Pages: 1-12

FIGURE 4: CORRELOGRAM OF SDXDER

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Monthly XAF-USD Exchange Rates Modelling Etuk and Nkombou

FIGURE 5: CORRELOGRAM OF DSDXDER

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Euro-Asian j. econ. financ.
ISSN: 2310-0184 (print); 2310-4929 (online)
Volume: 2, Issue: 1, Pages: 1-12
TABLE 1: ESTIMATION OF THE (1, 0, 5)X(0, 1, 0)12 SARIMA MODEL

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Monthly XAF-USD Exchange Rates Modelling Etuk and Nkombou

TABLE 2: ESTIMATION OF THE (0, 1, 1)X(0, 1, 1)12 SARIMA MODEL

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Euro-Asian j. econ. financ.
ISSN: 2310-0184 (print); 2310-4929 (online)
Volume: 2, Issue: 1, Pages: 1-12

FIGURE 6: CORRELOGRAM OF THE (1, 0, 5)X(0, 1, 0)12 SARIMA RESIDUALS

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 Monthly XAF-USD Exchange Rates Modelling Etuk and Nkombou

FIGURE 7: CORRELOGRAM OF THE (0, 1, 1)X(0, 1, 1)12 SARIMA RESIDUALS

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