Veritas Emerging Market Fund specializes in investing in emerging stock markets of the world. Mr. Henry Mobaus, an experienced hand in international investment and your boss, is currently interested in Turkish and Egyptian stock markets. But, at the same time, he is quite concerned with the volatile exchange rates of the Turkish lira and Egyptian pound. He would like to understand what drives Turkish and Egyptian exchange rates. Because the inflation rates are much higher in Turkey and Egypt than in the United States, he thinks that purchasing power parity may be holding at least to some extent. As a research assistant for him, you are assigned to check this out. In other words, you have to study and prepare a report on the following question: Does purchasing power parity hold for the Turkish lira-U.S. dollar and Egyptian pound-U.S. dollar exchange rates? Among other things, Mr. Mobaus would like you to do the following: 1. State the relative purchasing power parity (RPPP). You can refer to powerpoint slides in chapter 6 for RPPP. 2. Download the historical inflation rates for Turkey, Egypt, and the U.S., and the historical exchange rates of Turkish liras per U.S. dollar and the exchange rates of Egyptian pounds per U.S. dollar from 1989 to 2016. The historical inflation rates are available on the website of Inflation.eu, while the exchange rate data are available on the websites of the Central Bank of the Republic of Turkey and the Central Bank of Egypt. It takes time to download and organize the data. To make this task easier for you, I have supplied you the required data in the Excel file of Minicase data.xlsx. 3. Please use the data to perform regression analysis. Regress the annual rate of exchange rate changes on the annual inflation rate differential to estimate the intercept and the slope coefficient, and interpret the regression results. More specifically, the regression equations used to test the RPPP are: (STRY/USD,t Stry/USD,t-1)/STRY/USD,t-1 = a +B(Infrk,t Infus,t) + t (1) (Segp/USD,t SegP/USD,t-1)/SEGP/USD,t-1 = a +B(Infeg,t Infus,t) + t (2) where S denotes the end-of-the-year exchange rate, Inf is the annual inflation rate, is the error term, and subscripts TRY, EGP, USD, TK, EG, and US, and t denote Turkish lira, Egyptian pound, U.S. dollar, Turkey, Egypt, the U.S., and year t, respectively. Please see the attached screenshots for the regression procedure in Excel. The regression outputs will be saved to another worksheet. Please rename worksheets for Turkey and Egypt to avoid confusions. Keep these worksheets in the Excel file. 4. After obtaining the regression results from Excel, you will conduct hypothesis testing whether equals 1 for Turkish lira and Egyptian Pound. That is, the inflation rate differential between two countries will be reflected in the exchange rate differential. The followings are the null and alternative hypotheses: Ho: B = 1 Ha: # 1 The t-statistic in the hypothesis testing is: ( 1)/Std Error. The parameter estimate, , and the standard error of can be found in the regression output. Please compute the t- statistics for the cases of Turkey and Egypt. If the RPPP holds, we will not reject the null hypothesis that equals 1. A rule of thumb is to compare whether the t-statistic is greater or less than the critical value of 1.96 in the two-tailed test. If the t-statistic is less than the critical value of 1.96, we won't be able to reject the null hypothesis that equals 1. In other words, the null hypothesis is true at 95 percent of time. Therefore, the RPPP holds. 5. In a Word file, please put together the RPPP from Point 1, interpret the results of hypothesis testing from Point 4, and conclude whether the RPPP holds for the Turkish lira-U.S. dollar and Egyptian pound-U.S. dollar exchange rates. The length of your write-up can be in 3 paragraphs. Please submit your Excel and Word files by the due date. (St - St-1)/St-1 Inf_TK - Inf_US Year Inf_TK 1989 63.13% 1990 60.36% 1991 65.69% 1992 70.62% 1993 65.64% 1994 103.17% 1995 92.44% 1996 80.37% 1997 84.46% 1998 86.66% 1999 64.76% 2000 56.43% 2001 53.46% 2002 47.20% 2003 21.94% 2004 8.60% 2005 8.19% 2006 9.59% 2007 8.78% 2008 10.43% 2009 6.28% 2010 8.58% 2011 6.45% 2012 8.94% 2013 7.49% 2014 8.85% 2015 7.67% 2016 7.78% Inf US 4.83% 5.39% 4.25% 3.03% 2.95% 2.61% 2.81% 2.93% 2.34% 1.55% 2.19% 3.38% 2.83% 1.59% 2.27% 2.68% 3.39% 3.24% 2.85% 3.85% -0.34% 1.64% 3.16% 2.07% 1.47% 1.62% 0.12% 1.26% S (TL/$) 0.0023 0.0029 0.0051 0.0086 0.0145 0.0387 0.0597 0.1078 0.2056 0.3145 0.5414 0.6734 1.4501 1.6437 1.3966 1.3395 1.3451 1.4090 1.1708 1.5255 1.4909 1.4901 1.6029 1.7868 2.1382 2.2610 2.9211 3.5288 (St - St-1)/St-1 Inf_EG - Inf_US Year Inf_EG Inf_US 1989 21.26% 4.83% 1990 16.76% 5.39% 1991 19.75% 4.25% 1992 13.64% 3.03% 1993 12.09% 2.95% 1994 8.15% 2.61% 1995 15.74% 2.81% 1996 7.19% 2.93% 1997 4.63% 2.34% 1998 3.87% 1.55% 1999 3.08% 2.19% 2000 2.68% 3.38% 2001 2.27% 2.83% 2002 2.74% 1.59% 2003 4.51% 2.27% 2004 11.27% 2.68% 2005 4.87% 3.39% 2006 7.64% 3.24% 2007 9.32% 2.85% 2008 18.32% 3.85% 2009 11.76% -0.34% 2010 11.27% 1.64% 2011 10.05% 3.16% 2012 7.12% 2.07% 2013 9.42% 1.47% 2014 10.15% 1.62% 2015 10.36% 0.12% 2016 13.81% 1.26% S (EP/$) 1.1000 2.0000 3.3322 3.3386 3.3718 3.3910 3.3900 3.3880 3.3880 3.3880 3.4050 3.6900 4.4900 4.5000 6.1532 6.1314 5.7322 5.7036 5.5038 5.5041 5.4854 5.8049 6.0319 6.3190 6.9386 7.1401 7.7301 18.2665 Veritas Emerging Market Fund specializes in investing in emerging stock markets of the world. Mr. Henry Mobaus, an experienced hand in international investment and your boss, is currently interested in Turkish and Egyptian stock markets. But, at the same time, he is quite concerned with the volatile exchange rates of the Turkish lira and Egyptian pound. He would like to understand what drives Turkish and Egyptian exchange rates. Because the inflation rates are much higher in Turkey and Egypt than in the United States, he thinks that purchasing power parity may be holding at least to some extent. As a research assistant for him, you are assigned to check this out. In other words, you have to study and prepare a report on the following question: Does purchasing power parity hold for the Turkish lira-U.S. dollar and Egyptian pound-U.S. dollar exchange rates? Among other things, Mr. Mobaus would like you to do the following: 1. State the relative purchasing power parity (RPPP). You can refer to powerpoint slides in chapter 6 for RPPP. 2. Download the historical inflation rates for Turkey, Egypt, and the U.S., and the historical exchange rates of Turkish liras per U.S. dollar and the exchange rates of Egyptian pounds per U.S. dollar from 1989 to 2016. The historical inflation rates are available on the website of Inflation.eu, while the exchange rate data are available on the websites of the Central Bank of the Republic of Turkey and the Central Bank of Egypt. It takes time to download and organize the data. To make this task easier for you, I have supplied you the required data in the Excel file of Minicase data.xlsx. 3. Please use the data to perform regression analysis. Regress the annual rate of exchange rate changes on the annual inflation rate differential to estimate the intercept and the slope coefficient, and interpret the regression results. More specifically, the regression equations used to test the RPPP are: (STRY/USD,t Stry/USD,t-1)/STRY/USD,t-1 = a +B(Infrk,t Infus,t) + t (1) (Segp/USD,t SegP/USD,t-1)/SEGP/USD,t-1 = a +B(Infeg,t Infus,t) + t (2) where S denotes the end-of-the-year exchange rate, Inf is the annual inflation rate, is the error term, and subscripts TRY, EGP, USD, TK, EG, and US, and t denote Turkish lira, Egyptian pound, U.S. dollar, Turkey, Egypt, the U.S., and year t, respectively. Please see the attached screenshots for the regression procedure in Excel. The regression outputs will be saved to another worksheet. Please rename worksheets for Turkey and Egypt to avoid confusions. Keep these worksheets in the Excel file. 4. After obtaining the regression results from Excel, you will conduct hypothesis testing whether equals 1 for Turkish lira and Egyptian Pound. That is, the inflation rate differential between two countries will be reflected in the exchange rate differential. The followings are the null and alternative hypotheses: Ho: B = 1 Ha: # 1 The t-statistic in the hypothesis testing is: ( 1)/Std Error. The parameter estimate, , and the standard error of can be found in the regression output. Please compute the t- statistics for the cases of Turkey and Egypt. If the RPPP holds, we will not reject the null hypothesis that equals 1. A rule of thumb is to compare whether the t-statistic is greater or less than the critical value of 1.96 in the two-tailed test. If the t-statistic is less than the critical value of 1.96, we won't be able to reject the null hypothesis that equals 1. In other words, the null hypothesis is true at 95 percent of time. Therefore, the RPPP holds. 5. In a Word file, please put together the RPPP from Point 1, interpret the results of hypothesis testing from Point 4, and conclude whether the RPPP holds for the Turkish lira-U.S. dollar and Egyptian pound-U.S. dollar exchange rates. The length of your write-up can be in 3 paragraphs. Please submit your Excel and Word files by the due date. (St - St-1)/St-1 Inf_TK - Inf_US Year Inf_TK 1989 63.13% 1990 60.36% 1991 65.69% 1992 70.62% 1993 65.64% 1994 103.17% 1995 92.44% 1996 80.37% 1997 84.46% 1998 86.66% 1999 64.76% 2000 56.43% 2001 53.46% 2002 47.20% 2003 21.94% 2004 8.60% 2005 8.19% 2006 9.59% 2007 8.78% 2008 10.43% 2009 6.28% 2010 8.58% 2011 6.45% 2012 8.94% 2013 7.49% 2014 8.85% 2015 7.67% 2016 7.78% Inf US 4.83% 5.39% 4.25% 3.03% 2.95% 2.61% 2.81% 2.93% 2.34% 1.55% 2.19% 3.38% 2.83% 1.59% 2.27% 2.68% 3.39% 3.24% 2.85% 3.85% -0.34% 1.64% 3.16% 2.07% 1.47% 1.62% 0.12% 1.26% S (TL/$) 0.0023 0.0029 0.0051 0.0086 0.0145 0.0387 0.0597 0.1078 0.2056 0.3145 0.5414 0.6734 1.4501 1.6437 1.3966 1.3395 1.3451 1.4090 1.1708 1.5255 1.4909 1.4901 1.6029 1.7868 2.1382 2.2610 2.9211 3.5288 (St - St-1)/St-1 Inf_EG - Inf_US Year Inf_EG Inf_US 1989 21.26% 4.83% 1990 16.76% 5.39% 1991 19.75% 4.25% 1992 13.64% 3.03% 1993 12.09% 2.95% 1994 8.15% 2.61% 1995 15.74% 2.81% 1996 7.19% 2.93% 1997 4.63% 2.34% 1998 3.87% 1.55% 1999 3.08% 2.19% 2000 2.68% 3.38% 2001 2.27% 2.83% 2002 2.74% 1.59% 2003 4.51% 2.27% 2004 11.27% 2.68% 2005 4.87% 3.39% 2006 7.64% 3.24% 2007 9.32% 2.85% 2008 18.32% 3.85% 2009 11.76% -0.34% 2010 11.27% 1.64% 2011 10.05% 3.16% 2012 7.12% 2.07% 2013 9.42% 1.47% 2014 10.15% 1.62% 2015 10.36% 0.12% 2016 13.81% 1.26% S (EP/$) 1.1000 2.0000 3.3322 3.3386 3.3718 3.3910 3.3900 3.3880 3.3880 3.3880 3.4050 3.6900 4.4900 4.5000 6.1532 6.1314 5.7322 5.7036 5.5038 5.5041 5.4854 5.8049 6.0319 6.3190 6.9386 7.1401 7.7301 18.2665