Estimating the probability distribution of the exchange rate between Ghana Cedi and American dollar

Abstract

The aim of this research is to find the best probability distribution function (PDF) that fits the data on exchange rate between the Ghana Cedi and American dollar. Economic data in recent times is of much importance to many persons as well as the managers of a country as a whole. Volatilities in these data to a large extent have significant effect on the individuals and the country. The interest in exchange rate volatility by researchers can be attributed to the fact that, it is empirically difficult to predict future exchange rates precisely. The volatility of the US dollar/Ghana Cedi exchange rate is high. This has necessitated the need to have a reliable method for evaluating and minimizing the risk of trading in these currencies. Knowing the type of distribution the exchange rate between the two currencies follow will give stakeholders adequate information to prevent future shocks and loses from any volatility. The data used in this research was the monthly exchange rate between the Ghana Cedi and the American dollar from the year 2000 to 2017. From the analysis, it was observed that the data follow the lognormal distribution. Hence, this analysis has shown that the exchange rate between the Ghana Cedi and the US dollar is best modeled by the lognormal distribution. The Lognormal distribution gives a very good fit to the distribution of the Ghana Cedi and the American dollar. Keywords: Exchange rate, Forecast, Lognormal distribution, Model, Simulation, Volatility