Analysis of Nigerian Naira Exchange Rates against US Dollar, British Pounds, and Euro Currency Using Mean Reverting Model

Abstract

This work is aim at analyzing Nigerian Naira exchange rate against American Dollar, British Pounds, and the Euro currency. Monthly average exchange rates from May 2015 to April 2020 were used for the study. Augmented Dickey-Fuller was used to determine the presence of mean reversion in the data. The solution to the model is gotten using Ito’s formula. Mean reversion rate, long-run mean, and volatility were calculated from the historic data using Microsoft Excel. The concept of half-life was used to determine the time it will take for the rates to revert to their long-run mean. The data analysis reveals that the data are stationary. The analyses also reveal that American Dollar will be the cheapest currency followed by Euro in the near future. Based on the result, the researchers recommend mean reverting model in modeling exchange rates. The researchers also recommend that investors should invest using Dollar or Euro more than they use pounds