Problem Set #7
This problem set utilizes the following dataset.
In this exercise, you will be providing an empirical forecast of the Swiss Franc/US Dollar Exchange Rate. The Data Set includes the following variables for both the US and Switzerland:
Interest Rates (2 yr, 3 yr, 5 yr, 7 yr and 10 yr assets)
Annualized Growth in M1, M2, and M3 money supplies
Annualized Growth in Retail Sales (think of this as a proxy for GDP)
Annual Inflation Rate
You also have the Spot exchange rate as well as the three month and 6 month forward rates.
1) Construct an empirical model of the Swiss Franc/US Dollar exchange rate. You can use any combination of the variables you want, but you need tyo explain why each variable was used. Your goal for this exercise is to construct the best model possible (i.e. high T-stats, high R squared).
2) Given your model in part (1), provide a one month ahead forecast for the Swiss Franc.
3) Given your model in Part (1), construct a 95% confidence interval for your forecast.
You only need to turn in your regression output and your solutions for (2) and (3).