FACTOR BASED MODEL TO IDENTIFY THE DETERMINANTS OF EXCHANGE RATE FLUCTUATION IN SRI LANKA

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Published: 2017-03-07

Page: 149-154


S. A. L. M. UDANI *

Research and Development Centre for Mathematical Modeling, Department of Mathematics, University of Colombo, Colombo, Sri Lanka.

S. S. N. PERERA

Research and Development Centre for Mathematical Modeling, Department of Mathematics, Faculty of Science, University of Colombo, Colombo, Sri Lanka.

*Author to whom correspondence should be addressed.


Abstract

This study is focused on the exchange rate behavior patterns in Sri Lanka through the exchange rate volatility. Exchange rate volatility refers to the tendency for foreign currencies to appreciate or depreciate in value, thus affecting the profitability of foreign exchange trades. Usually the returns of exchange rates can be represented by a factor model. There are six daily exchange rate values Euro, Great Britain Pound, Japanese Yen, US Dollar, Indian Rupee, Pakistan Rupee against the Sri Lankan Rupee that are used during the time period of October, 2013 to November, 2015. The factor model is estimated using Principal Component Analysis. Euro, Great Britain Pound, Japanese Yen are defined by factor one, Pakistan Rupee, Indian Rupee are defined by factor two and US Dollar is defined by factor three. Therefore the six variables can be reduced into three factors and they represented 78% of total variance.

Keywords: Exchange rate volatility, factor model, principal component analysis


How to Cite

M. UDANI, S. A. L., & PERERA, S. S. N. (2017). FACTOR BASED MODEL TO IDENTIFY THE DETERMINANTS OF EXCHANGE RATE FLUCTUATION IN SRI LANKA. Journal of Global Economics, Management and Business Research, 8(3), 149–154. Retrieved from https://ikprress.org/index.php/JGEMBR/article/view/3330

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