Research on multiscale features and integrated forecasting of the Belt and Road exchange rate index

Abstract

AbstractMassive progress and fruitful results have been achieved since the implementation of the Belt and Road Initiative (B&R). However, the risk of exchange rate between countries along the Belt and Road cannot be ignored. In this paper, we propose a B&R exchange rate index to evaluate the currency risk of countries along the B&R, along with a research on the multiscale features of the B&R exchange rate index and the effective RMB exchange rate index using the EMD algorithm. Then, we propose an integrated forecasting approach. We adopt the EMD algorithm and the Grey Relational Analysis to decompose and reconstruct the B&R exchange rate index and the effective RMB exchange rate index into three subsections with different volatility characteristics. The prediction outcome of the integrated model for the original series equals a sum of the Auto‐regressive Integrated Moving Average model for trend term and the Long Short‐Term Memory model for market fluctuation term as well as noise term. The results of our prediction demonstrate a much better performance of our proposed integrated forecasting model than pure methods. Lastly, several suggestions are put forward to help relevant enterprises effectively avoid and manage the exchange risks.