Forecasting Exchange Rate in India: An Application of Artificial Neural Network Model

Abstract

The paper employs Artificial Neural Network (ANN) to forecast foreign exchange rate in India during 1992-2009. We used two types of data set (daily and monthly) for US dollar, British pound, euro and Japanese yen. The performance of forecasting is quantified by using various loss functions namely root mean square error (RMSE), mean absolute error (MAE), mean absolute deviation (MAD) and mean absolute percentage error (MAPE). Empirical results confirm that ANN is an effective tool to forecast the exchange rate. The technique gives the evidence that there is possibility of extracting information hidden in the foreign exchange rate and predicting it into the future. The evaluation of the proposed model is based on the estimation of the average behaviour of the above loss functions.