keywords: Time series, ARIMA model, natural log transformation, square root transformation.
Exchange rate of any country’s currency goes a long way in affecting various economic activities and it ensures effective and efficient planning. In order to assist different policy makers in Nigeria in purposeful prediction by identifying and validating the usage of essential model, the yearly average exchange rate of Nigeria naira to US dollar from 1960 to 2015 is examined. ARIMA (0,0,0 to 2,2,2) were sequentially examined using Square Root Transformation (SRT), Natural Log Transformation (NLT) and original series without transformation (WT). NBIC, RMSE, MAE, and Ljung-Box Q are used as selection criteria among all the competing models within and among different transformations. ARIMA(1,0,0) when SRT is utilized is found to provide optimal output with stationary-R2 of 0.976; coefficient of determination (R2) of 97.3%; NBIC of 4.888 and Ljung-Box Q P-value of 0.981. Hence, the recommended model for forecasting of average yearly exchange rate of Nigeria naira to US dollar.
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