The dynamics of philippine foreign exchange rates (2013-2017): A test for Chaos

Abstract

In most studies on dynamics of time series financial data, the absence of chaotic behavior is generally observed. However, this theory is not yet established in the dynamics of foreign exchange rates. Conflicting claims of presence and absence of chaos in foreign exchange rates open door for further investigation considering various deterministic factors. This work examines the dynamics of exchange rate of the Philippine Peso against selected foreign currencies. Time series data were collected for eight (8) of Philippine’s top trading partners as categorized according to economic condition. The data obtained with permission from the Central Bank of the Philippines covered the years 2013 to 2017. Data sets were plotted revealing non-linear movement of Philippine exchange rates against time. The foreign exchange rate time series obtained per currency were examined for chaotic behavior by computing the Largest Lyapunov Exponents (LLE). A positive Lyapunov exponent is an indication of sensitivity dependence, i.e, a chaotic dynamics; whereas, a negative Lyapunov exponent indicates otherwise. Computed LLE’s varied per currency but all were found to be negative. Therefore, using the Largest Lyapunov Exponent Test (LLE), analysis of the time series of Philippine foreign exchange rates shows little evidence of chaotic patterns.