Statistical Analysis of Foreign

Exchange Rate and FDI

10/8/2017

Subodh Kumar
Table of Contents
1 ABSTRACT .................................................................................................................................................... 2
1.1 Inflation ........................................................................................ 2
1.2 Bank Rate .................................................................................... 2
1.3 Speculation ................................................................................... 3
1.4 Change in competitiveness ................................................................. 3
1.5 Balance of Payment ......................................................................... 3
1.6 Government Debt ............................................................................ 3
1.7 Government Intervention ................................................................... 4
1.8 Foreign Direct Investment .................................................................. 4
1.9 Economic Growth ............................................................................ 4
2 TOPIC OF THE PAPER ............................................................................................................................. 5
3 BODY OF THE PAPER ............................................................................................................................. 5
3.1 Statistical Analysis Considered ............................................................ 5
3.2 Kurtosis ....................................................................................... 5
3.3 Skewness ..................................................................................... 6
3.4 Null and Alternative Hypothesis ............................................................ 7
3.5 Data Sample ................................................................................. 7
3.6 Data Preparation ............................................................................. 8
3.7 Decision ....................................................................................... 8
3.8 Regression Analysis ......................................................................... 9
3.9 Kurtosis & Skewness Analysis ............................................................. 9
3.10 Regression Statistics Table ................................................................ 9
3.11 ANOVA Table ............................................................................... 10
4 SUMMARY OR CONCLUSION .............................................................................................................. 11
5 REFERENCE ............................................................................................................................................. 11
6 APPENDIX ................................................................................................................................................. 12
7 ABOUT THE AUTHOR ............................................................................................................................ 14

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1 Abstract
Foreign exchange rate is the value of one currency in another currency.

Due to globalization, the importance of stable foreign exchange rate for a country
is of utmost importance.

Forex exchange rates are determined by many factors, some of them are given
below.

1.1 Inflation
When the inflation in a country is low, the produce from that country is supposed
to be more competitive. This will help make better export from the country, at the
same time the imports will be costly. People across the world will buy products
from that country which will lead to demand for its currency which in turn will lead
to appreciation in the value of the currency.

Inflation

Foreign Exchange Rate

1.2 Bank Rate

A bank rate is the interest rate at which a nation's central bank lends money to
domestic banks, often in the form of very short-term loans. Managing the bank
rate is method by which central banks affect economic activity. Lower bank rates
can help to expand the economy leading to appreciation in foreign exchange
rate.

Bank Rate reflects interest rate in a country. When the interest rate in a country
is high, people will deposit money in that country to get better returns. So, the
demand for the currency shall increase; this in turn will increase the value of the
currency.

Bank Rate

Foreign Exchange Rate

Interest Rate

Foreign Exchange Rate

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 1.3 Speculation
Sometimes market sentiments drive the foreign exchange rate. E.g. after BrExit
the value of Sterling Pound crashed against leading currencies. This happened
due to negative market sentiment about UK that it would no longer be an
attractive financial hub.

Speculation

Foreign Exchange Rate

1.4 Change in competitiveness

Change in competitiveness can increase due to many factors like increased
productivity, cheap labour and business friendly laws by the government etc.

Demand for currency rises which leads for appreciation in currency value.

Change in Competitiveness

Foreign Exchange Rate

1.5 Balance of Payment

Balance of payment is also termed as current account deficit. When a country
imports more than its export and does not have enough capital inflows to
finance the current account deficit then the value of the currency will depreciate.

Current Account Deficit

Foreign Exchange Rate

1.6 Government Debt

When the value of the government debt exceeds expected limit, market fears for
government default. This can lead to pulling investment out of the country by
investors leading to depreciation in value of the currency.

Government Debt

Foreign Exchange Rate

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 1.7 Government Intervention
Sometimes government of a country tries to keep value of its currency low to
keep its goods competitive in the market.

Government Intervention

Foreign Exchange Rate

1.8 Foreign Direct Investment

FDI can lead to appreciation in value of currency as there is a demand for local
currency when FDI flows into a countrys financial system.

FDI

Foreign Exchange Rate

1.9 Economic Growth

At the time of economic growth, the domestic currency becomes stronger than
leading currencies, this helps reduce the import bill.

Similarly, at the time of recession, the value of currency goes down as there is
less demand for currency due to poor business prospect. This helps the export
industry to produce and sell goods at more competitive rates in international
markets.

Government increases the supply of money through QE (Quantitative Easing)

into the system which leads to depreciation in value of the currency.

Economic Growth

Foreign Exchange Rate

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2 Topic of the paper
As explained in above section, foreign exchange rate is influenced by FDI. In this
paper, the author is trying to perform statistical analysis using multiple linear
regression on three data series as given below.

1. Independent Variable: Quarterly FDI in China/Annual GDP

2. Independent Variable: Quarterly FDI in UK/ Annual GDP
3. Dependent Variable: GBP/CNY rate

The objective of this paper is to perform statistical test whether there is some
relationship between independent variable and the dependent variables using
multiple regression analysis.

3 Body of the paper

In this section, we shall perform multiple regression analysis on following
variables. All the data series start from Jan-1999 and end at Dec-2016.
1. Independent Variable: Quarterly FDI in China/Annual GDP
2. Independent Variable: Quarterly FDI in UK/ Annual GDP
3. Dependent Variable: GBP/CNY quarterly rate

3.1 Statistical Analysis Considered

This section explains the statistical concepts followed in this paper e.g. Kurtosis,
Skewness, hypothesis testing concepts etc.

Kurtosis and Skewness of data are performed to check whether data is normally
distributed. The null and alternative hypothesis (regression) analysis is
performed considering that the data is normally distributed data.

3.2 Kurtosis
Kurtosis characterizes the relative peakedness or flatness of a distribution
compared with the normal distribution. This parameter is considered on sample
data before considering for regression analysis.

The standard range for Kurtosis (calculated by Excel and called excess kurtosis)
is given as below.

Kurtosis Value Interpretation

>0 Sample data distribution is relatively peaked in comparison
to Normal distribution
<0 Compared to a normal distribution, data distribution tails
are shorter and thinner, and often its central peak is lower
and broader
0 The data is nearly symmetrical and normal

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The critical value of test statistic for Kurtosis (Zg2) is approximately 2. (This is a
two-tailed test of excess kurtosis 0 at approximately the 0.05 significance
level.)

The critical value for test statistic for Kurtosis is given in below table.

Test Statistic Interpretation

Zg2 < 2 The data distribution has very likely negative excess
kurtosis though we dont know how much
-2<Zg2<2 Kurtosis might be positive, negative, or zero

Zg2 > +2 The data distribution has very likely positive excess kurtosis
though we dont know how much

3.3 Skewness
Skewness characterizes the degree of asymmetry of a distribution around its
mean.

The standard range for skewness (calculated by Excel) is given as below.

Skewness Value Interpretation

>0 It indicates a distribution with an asymmetric tail extending
toward more positive values
<0 It indicates a distribution with an asymmetric tail extending
toward more negative values
0 The data is nearly symmetrical and normal

As per classic thump of rule, following range can be explained for skewness.

Skewness (S) Interpretation

Range
S <-1 or S>1 The data distribution is highly skewed

-1<S<-0.5 or The data distribution is moderately skewed

0.5<S<1
-0.5<S<0.5 The data is nearly symmetrical and normal

The critical value of test statistic for skewness (Zg1) is approximately 2. (This is
a two-tailed test of skewness 0 at roughly the 0.05 significance level.)

The critical value for test statistic for skewness is given in below table.

Test Statistic Interpretation

Zg1 < 2 The data distribution is very likely negative skewed

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 -2<Zg2<2 The distribution might be symmetric, or it might be skewed
in either direction
Zg2 > +2 The data distribution is very likely positive skewed

3.4 Null and Alternative Hypothesis

Following hypothesis has been considered for this study.
1. Regression Line can be represented by following

2. Data description

Y = Quarterly GBP/CNY exchange rate

= Quarterly FDI/Annual GDP for UK

= Quarterly FDI/Annual GDP for China

= Standard Error

3. Null Hypothesis:
a. There is no relationship between the dependent variable and
independent variables

b.

4. Alternative Hypothesis:
a. There is some relationship between the dependent variable and
independent variables. The dependent variable can be predicted
using the independent variables

b.

3.5 Data Sample

The sample data is collected from internet. Please see the appendix for more
details.

Following approach has been taken to collect the data.

China FDI Data:
o FDI monthly data is available from Government of China statistical
department.
o The parameter Value of Foreign Direct Investment Actually Utilized,
Accumulated (USD million) is taken for this study. The definition is
given in appendix.
o FDI data is captured in million dollars

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 China GDP Data:
o GDP data is captured in million dollars

UK FDI Data:
o FDI data is captured in million pounds

UK GDP Data:
o GDP data is captured in million pounds

GBP/CNY rate:
o Monthly GBP/CNY exchange rate is captured

3.6 Data Preparation

This section describes the data preparation activities performed before
conducting the data analytics.

FDI for China is available as monthly accumulative from January till

December. Quarter data is calculated from this monthly accumulative
data.
Data for FDI in China and GDP of China are available in $m. Data for FDI
in UK and GDP of UK are available in $GBP. To bring the data independent
of currency unit and bring the variables at similar scale FDI/GDP has been
considered as independent variable
Data for Q3 2011 and Q1 2002 have been taken off from data analysis.
Because the FDI for UK on these quarters are negative.
GBP/CNY rate:
o Quarterly rate is derived as average of monthly exchange rate
Natural log of independent variable UK:FDI Inflow/Annual GDP)*1000
has been considered for analysis because values for UK:FDI
Inflow/Annual GDP)*1000 is highly skewed and has high value for
kurtosis

3.7 Decision
Critical value of test statistics for Kurtosis and Skewness are considered to check
whether data captured is normally distributed.

P-value is used to make decision for hypothesis testing in this paper.

For current hypothesis testing, we take = 0.05 as significance level. It is to be

noted that significance level (alpha or ) is the probability of rejecting the null
hypothesis when it is true. The author is willing to falsely reject null hypothesis
(H0) 5% of the time.

So, we have following decision rule.

1. Reject the null hypothesis when p<=

2. Accept the null hypothesis when p>

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 3.8 Regression Analysis
Microsoft excel is used to check the skewness, kurtosis and to perform the
multiple regression analysis.

3.9 Kurtosis & Skewness Analysis

The kurtosis and skewness analysis is displayed in below table.

X1 = X2 =
LN(UK FDI Inflow/Annual GDP)*1000) China:(FDI Inflow/Annual GDP)*1000
Kurtosis 1.032581851 Kurtosis 1.191393768
Skewness 0.448928353 Skewness 0.362660053
Test statistic Zg1-skewness -1.565571496 Test statistic Zg1-skewness 1.264723509
Test statistic Zg2-Kurtosis 1.823495414 Test statistic Zg2-Kurtosis -2.103950472

We can conclude following information from the able table:

- Test statistic for kurtosis for X1 is 1.823495414, which means we can

treat this as normal
- Test statistic for kurtosis for X2 is -2.103950472, which means we can
treat this as slightly negative kurtosis
- Test statistic for skewness for X1 is -1.565571496, which means we can
treat this as normal
- Test statistic for skewness for X2 is 1.264723509, which means we can
treat this as normal

3.10 Regression Statistics Table

The following table is derived from the excel.

Regression Statistical Name Comment

Statistics Data
Multiple R 0.613541 Pearsons correlation coefficient Strong Relationship
R Square 0.376433 Coefficient of determination Moderate
Adjusted Coefficient of Moderate
Adjusted R Square 0.357818 determination
Standard Error 1.727759 Standard Error of Regression Moderate
Observations 70
Following points can be explained from the above table.

Multiple R: It is used in statistics to measure how strong a relationship is

between the independent variable and the dependent variable. The range
of the correlation coefficient is from -1 to 1.
R Square: It gives you an idea of how many data points fall within the
results of the line formed by the regression equation. It ranges between 0

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 to 1; 1 means all the data points lie on regression line and 0 means none
of the points lie on the regression line.
Adjusted R Square: It has similar meaning as R square. It shows more
sensitivity when some data points are added in sample.
Standard Error: It is a measure of how spread out the dependent data
points are around the mean, . The standard error of the regression slope
also called the standard error of estimate represents the average distance
that your observed values deviate from the regression line. The smaller the
value of standard error, the better is the regression line
Observation: No. of sample data points taken for study

3.11 ANOVA Table

The following ANOVA table is derived from the excel.
ANOVA
df SS MS F Significance F
Regression 2 120.7383981 60.3692 20.22315314 1.34459E-07
Residual 67 200.0052271 2.985153
Total 69 320.7436252

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 8.830897755 0.60292154 14.64684 1.44139E-22 7.627461326 10.03433419 7.627461326 10.03433419
LN(UK FDI/Annual GDP)*1000) 0.166264208 0.195954732 0.848483 0.399190445 -0.224863075 0.55739149 -0.224863075 0.55739149
China:
(FDI Inflow/Annual GDP)*1000 0.690058054 0.109103753 6.324788 2.39718E-08 0.472286053 0.907830056 0.472286053 0.907830056

Following points can be explained from the above table.

The value for Significance F = 1.344E-07. This is much less than = 0.05.
So, we can reject the null hypothesis
Also, if we see the p-value for Intercept i.e. Beta-0 and independent
variables China:(FDI Inflow/Annual GDP) *1000 (Beta2) are all less that
= 0.05. Using this information, we can reject the null hypothesis
However, for independent variable LN (UK FDI/Annual GDP) *1000)
(Beta1) is all less that > 0.05. Using this information, we can say that Y
is not statistically dependent on X1.
The regression line can be written as follows
GBP/CNY Exchange = 8.830897 + 0.690058 * China:(FDI Inflow/Annual GDP) *1000 + Standard Error
The regression line indicates that the GBP/CNY exchange rate is positively
proportional to independent variable X2

We also see that and

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4 Summary or Conclusion
The focus for this article is to study whether GBP to CNY exchange rate has some
relationship with FDI flowing to UK and China in proportion to their GDP size.

After performing multiple regression analysis on the sample data, we have found
statistical measurement to reject the null hypothesis (partially).

This concludes that statistically there is some relationship between GBP/CNY

exchange rate with FDI flowing to China.

5 Reference
China FDI Data:
http://data.stats.gov.cn/english/easyquery.htm?cn=A01

UK FDI Data:
https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseri
es/hjyr/pnbp

China GDP Data:

www.worldbank.com

UK GDP Data:
https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ybha/qn
a

GBP/CNY rate:
https://uk.investing.com/currencies/gbp-cny-historical-data

Skewness:
http://pirate.shu.edu/~wachsmut/Teaching/MATH1101/Descriptives/excel.html
https://support.office.com/en-us/article/SKEW-function-BDF49D86-B1EF-4804-
A046-28EAEA69C9FA

Kurtosis:
http://www.stattutorials.com/EXCEL/EXCEL-DESCRIPTIVE-STATISTICS.html
https://brownmath.com/stat/shape.htm

General Information on Statistics:

http://www.statisticssolutions.com/assumptions-of-multiple-linear-regression/
http://www.statisticshowto.com/multiple-regression-analysis/
http://cameron.econ.ucdavis.edu/excel/ex61multipleregression.html
http://www.excel-easy.com/examples/regression.html
https://onlinecourses.science.psu.edu/statprogram/node/139
http://www.statisticshowto.com/what-is-an-alpha-level/
http://support.minitab.com/en-us/minitab-express/1/help-and-how-to/basic-
statistics/inference/supporting-topics/basics/what-is-a-test-statistic/

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http://blog.minitab.com/blog/adventures-in-statistics-2/regression-analysis-
how-to-interpret-s-the-standard-error-of-the-regression
http://www.statisticshowto.com/excel-regression-analysis-output-explained/
http://www.statisticshowto.com/find-standard-error-regression-slope/

6 Appendix
6.1 Prepared Data

Quarter Year LN(UK FDI/Annual China: GBP/CNY

GDP)*1000) (FDI Inflow/Annual
GDP)*1000
Q4 2016 3.741870586 1.972917587 8.4927
Q3 2016 2.707238263 1.604407477 8.7371
Q2 2016 2.320863073 2.153199127 9.2803
Q1 2016 3.161494075 3.162293567 9.250533
Q4 2015 1.011788273 2.041724754 9.650867
Q3 2015 1.631153185 1.65138306 9.701033
Q2 2015 1.28921583 2.161565709 9.5803
Q1 2015 0.639454449 3.152648603 9.427
Q4 2014 1.20730844 2.259126229 9.685933
Q3 2014 0.337293553 1.546978207 10.19167
Q2 2014 0.120346768 2.199597714 10.5467
Q1 2014 1.340880521 3.00971975 10.2039
Q4 2013 1.710948635 2.140056219 9.924767
Q3 2013 0.932054637 1.792088907 9.573367
Q2 2013 0.620959744 2.461064652 9.412467
Q1 2013 0.998543065 3.112761733 9.5799
Q4 2012 0.994326445 2.333963041 10.0518
Q3 2012 1.579181631 1.957117957 10.06887
Q2 2012 1.125027271 2.47741182 10.01133
Q1 2012 2.018993995 3.443705227 10.0147
Q4 2011 1.552263165 2.773040509 10.0054
Q2 2011 -1.978901004 2.916849315 10.62507

Q1 2011 2.287759473 4.006574077 10.58723

Q4 2010 2.196528571 3.890096189 10.4505
Q3 2010 2.135591598 2.62038925 10.53
Q2 2010 0.348235614 3.383426405 10.16233
Q1 2010 2.123399996 3.842723958 10.56683
Q4 2009 2.402467537 3.749935883 11.1642
Q3 2009 1.367794548 3.013334346 11.15753

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 Q2 2009 1.10152657 3.00198395 10.79327
Q1 2009 1.578540554 4.261682169 9.830167
Q4 2008 1.895008333 2.45726299 10.48943
Q3 2008 0.08209172 2.968549413 12.743
Q2 2008 1.984557671 3.777778158 13.76857
Q1 2008 2.859501841 5.961891107 14.10523
Q4 2007 2.932352593 5.847953687 15.09073
Q3 2007 2.271341898 2.896247414 15.313
Q2 2007 2.67924366 3.24589159 15.28463
Q1 2007 2.062167336 4.474150481 15.22803
Q4 2006 0.680816051 5.248657961 15.2383
Q3 2006 2.129056723 3.59067068 14.94603
Q2 2006 2.228547816 3.614652087 14.80333
Q1 2006 2.850176074 5.176350385 14.1263
Q4 2005 1.558852987 5.211801383 14.05903
Q3 2005 3.845052673 4.442761024 14.37477
Q2 2005 0.65387886 4.851341055 15.2223
Q1 2005 1.798192443 5.856605415 15.71333
Q4 2004 2.168504296 3.502702246 15.63523
Q3 2004 1.015548353 5.261980349 14.99257
Q2 2004 1.68477329 7.295889946 14.98203
Q1 2004 0.013577451 7.193606335 15.2774
Q4 2003 0.231663703 5.992335507 14.3566
Q3 2003 0.030357482 4.146269738 13.37897
Q2 2003 -0.35663135 7.487859586 13.49053
Q1 2003 -1.002842542 7.881767257 13.25667
Q4 2002 0.647735539 5.455102886 13.05987
Q3 2002 1.633982463 6.809698367 12.91853
Q2 2002 1.016619463 7.101426008 12.26397
Q4 2001 1.025140165 7.165172966 11.95483
Q3 2001 0.824823264 5.963138114 12.01047
Q2 2001 1.701911959 7.28388324 11.77153
Q1 2001 2.006884604 5.956418664 11.93233
Q4 2000 1.657189094 7.73519452 12.05897
Q3 2000 3.526483281 5.603682007 12.2079
Q2 2000 2.076447525 6.12954315 12.61253
Q1 2000 1.851056717 5.894267756 13.20867
Q4 1999 3.120645469 7.253215447 13.40607
Q3 1999 2.354517315 7.080454549 13.44453
Q2 1999 1.130612771 7.610620266 13.21813
Q1 1999 2.145770735 6.709338548 13.4102

6.2 Data Definition

Variable Definition

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 China FDI Definition Foreign Direct Investment refers to foreign investment
in China through the establishment of foreign invested
enterprises, cooperative exploration and development
of petroleum resources with domestic investors and
the establishment of branch organizations of foreign
enterprises. Foreign investment can be made in forms
of cash, physical investment, technical know-how and
reinvestment of the foreign enterprises with the profits
gained from the investment.
China GDP Definition GDP at purchaser's prices is the sum of gross value
added by all resident producers in the economy plus
any product taxes and minus any subsidies not
included in the value of the products. It is calculated
without making deductions for depreciation of
fabricated assets or for depletion and degradation of
natural resources. Data are in current U.S. dollars.
Dollar figures for GDP are converted from domestic
currencies using single year official exchange rates.
For a few countries where the official exchange rate
does not reflect the rate effectively applied to actual
foreign exchange transactions, an alternative
conversion factor is used.
UK FDI Definition Total FDI : Net Transactions in Equity Capital

7 About the author

Author Name : Subodh Kumar
Education : B.E. from NIT, Jamshedpur
Executive management program from XLRI, Jamshedpur
Designation : Senior Domain Consultant
Division : Banking
Experience : 13+ years in IT industry
Areas of interest : AML-KYC, Commercial Lending, Credit Risk

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