Vagaries of the Euro: an Introduction to ARIMA Modeling

The goal of this study is to provide a detailed example of ARIMA modeling in the form of a case study that could be used for teaching and learning purposes. We present three ARIMA models using macroeconomic indicators to model the USD/EUR exchange rate. We find that over the period from January 1994 to October 2007, the monthly USD/EUR exchange rate is best modeled by a linear relationship between its past three values and the current and past three values of the difference between the log-levels of the share prices indices in the European Monetary Union and the USA.