Stochastic Analysis of the Exchange Rate of Naira, YEN, GBP, CFA and FRANC in Relation to US Dollar and Predicting the Naira for the Year 2025

Abstract

In Nigeria today, constant fluctuations of exchange rate or volatility is of great importance in one way or the other to the general public because its fluctuation has an effect on the economy. The objectives of the paper were to investigate the recent changes in the naira currency and other world currencies if there appear to be any relationship. Data was obtained from daily exchange rate of different countries’ currencies from 12/10/2005 and 2/11/2018 with 3,190 observations obtainable from the Data and statistics publication of the Central Bank of Nigeria. The study investigates the past recent changes in the naira and four foreign currencies of the world (Pounds, Yen, Cfa and Swiss Franc) and their relationship plotted as signal using MATLAB 2016a. The four currencies were randomly selected from the list of world currencies. Multiple Linear Regression was used to perform the analysis. The analysis of 3,190 observation resulted in a prediction model that has 97% prediction accuracy, which suggests that under ideal circumstances and baring any natural disaster, total collapse of the economy or major crisis like recession. The results from the model of this study suggest that fluctuation in currency exchange rate of other currencies has significance on the Nigerian exchange rate and as such should be considered when designing exchange rate policies.