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Corresponding Author:
Chaido Dritsaki, Department of Accounting and Finance, Western Macedonia University of Applied Sciences, Kila, Kozani, Greece

Modeling the Volatility of Exchange Rate Currency using GARCH Model

Volume 72 - Issue 2, May 2019
(pp. 209-230)
JEL classification: C22, C32, C53
Keywords: Exchange Rate, Volatility, ARIMA-GARCH Models, Forecasting

Abstract

In this paper, we study GARCH models with their modifications in order to study the volatility of Euro/US dollar exchange rate. Given that there are ARCH effects on exchange rate returns Euro/US dollar, we estimated ARCH(p), GARCH(p,q) and EGARCH(p,q) including these effects on mean equation. These models were estimated with maximum likelihood method using the following distributions: normal, t-student and generalized error distribution. The log likelihood function was maximized using Marquardt’s algorithm (1963) in order to search for optimal parameter of all models. The results showed that ARIMA(0,0,1)-EGARCH(1,1) model with generalized error distribution is the best in order to describe exchange rate returns and also captures the leverage effect. Finally, for the forecasting of ARIMA(0,0,1)-EGARCH(1,1) model both the dynamic and static procedure is used. The static procedure provides better results on the forecasting rather than the dynamic.

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Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
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