Abstract:
The main purpose of this study to explore the main characteristics of
stochastic behavior of Sri Lankan exchange rate against to US dollar. The study used
daily exchange rate time series, Sri Lankan exchange rate, (LKR/USS) and collected
from Central Bank, Sri Lanka. The study period covers a time period from 2008 to
2010, which represents 722 trading days. The sample period was divided into two as
January 1,2008 to May 19,2009 and May 30,2009 to December 31, 2010 in order to
investigate the impact of the war.
The results shows that basic statistics properties of Sri Lankan exchange rate
series was a nonlinear, non stationary series with stochastic trend, 1(1), and has fetter
tails, random walk nature (unit roots), asymmetric shape, serial dependence, volatility
clustering, ARCH effects in both sample periods. In the period I: The exchange rate
was depreciating, distribution was positively skewed, larger volatility (50=3.4), non
normal, non stationary . But in the period II, exchange rate was appreciating, high
persistent (sum of auto correlated coefficient5=32), skewed negatively.
The changes of log exchange rate behave as normal with an autoregressive
conditional hetero scedasticity process for innovations. The characteristics of exchange
rate change indicate the presence of heterogeneity among market participants as well as
changing parameters over time. Standard deviation of this distribution dominates the
mean value. Variance was also time varying.
The results of this study have important implications for exchange rate
determination, risk management, forecasting, market efficiency, statistical inference in
empirical work.
