Econometric Analysis of the Daily Exchange Rate between the Dollar and the Yen
By: Andrew Dupere

Intro: The purpose of this model is to explain the variation in price of the USD/JPY currency pair by trying to understand how other financial markets such as stock indexes and other exchange rates affect the USD/JPY. I am personally interested in this study because I trade the USD/JPY along with many other individuals and institutions. An accurate model will provide insight how stock indexes affect the USD/JPY, opportunities to trade the USD/JPY and a foundation to do studies on other currency pairs. Literature Review: A similar study was done by a group of economists (Saeed, Ahmed; Rehmat Ullah Awan) from The University of Sargodha in Pakistan titled “An Econometric Analysis of Determinants of Exchange Rates in Pakistan”. For variables the study used the money supply in each country, the foreign exchange reserve of each country’s government, the government debt of each country and a dummy variable to account for news releases. To calculate each variable (without the coefficient) the respective United States value was subtracted from the Pakistani value and the variables represented the difference between the determinants in each country. Another study on exchange rates was done by A. D. Cohen, from The University of Witwatersrand called “An Econometric Model for Foreign Exchange Rate Forecasting”. For variables, Cohen used balance of payments, foreign exchange reserves, employment index, interest rates, prices and money supply. The purpose of this study was to try and predict exchanges rates between the South African Rand and the currencies of major European trading partners. This model was surprisingly accurate in its monthly predictions.

Model: USD/JPYt = β0 + β1DJIAt + β2NIKKEIt + β3Stochastict + єt
Two types of models were tested, one where each