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Term Paper Proposal (Due March 1) (Marks: 10% of your final grade)
A double spaced two (max 4) page proposal of your term paper must be submitted before July 10 at 5pm.
Your proposal must contain the following:
1) Research Question
a. Define the forecasting object you are going to focus on.
b. Paper Title can be “ Predictability of Foreign Exchange Rate”
c. Be more specific about your objective. Are you focusing on one currency rate or a basket of rates.
d. Another example is “What is the impact of exchange rate volatility on non-residual investment in Canada?” You can answer this question by building a forecasting model for non-residential investment and using a battery of tests to show that FX rates helps to produce better forecasts.
2) Motivation
a. Your paper must be well motivated. Why do I want to forecast exchange rate? Who is the audience for your report? The government, institutional investors or consumers?
3) Contribution
a. Are you proposing a new model for FX rates? A new data set for an existing model? A new factor for a classical model? For example Uncovered Interest Rate Parity gives you a model as
FXt = ift – idt
where FX is the real exchange rate, ift and idt are foreign and domestic interest rates, respectively. Your contribution will be augmenting the classical UIRP model with a new variable foreign currency reservet.
FXt = 0 + 1 ift + 2 idt + + 3 reservet + ut
I want to remind you that you need to run ECM with all these factors, so you will be dealing with a multi-equation model.
4) Simple Data Analysis
I would like to make sure that you have collected your dataset for the term paper. You should report the following:
a) Summary statistics of stationary and non-stationary data
b) Graph the dependent variable against time. (Both stationary and nonstationary data)
c) Correlation matrix for all your variables in the model
d) Report significant events (outliers) with a table.
5) Run the best ARMA model and report the RMSE and MAE for in-sample and out-of-sample forecasts.
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