Conditional Volatility and Distribution of Exchange Rates: GARCH and FIGARCH Models with NIG Distribution

Kiliç Rehim ()
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Kiliç Rehim: Georgia Institute of Technology

Studies in Nonlinear Dynamics & Econometrics, 2007, vol. 11, issue 3, 33

Abstract: This paper extends the Fractionally integrated GARCH (FIGARCH) model by incorporating Normal Inverse Gaussian Distribution (NIG). The proposed model is flexible and allows one to model time-variation, long memory, fat tails as well as asymmetry and skewness in the distribution of financial returns. GARCH and FIGARCH models for daily log exchange rate returns with Normal, Student's t and NIG error distributions as well as GARCH/FIGARCH-in-mean models with t errors are estimated and compared both in terms of sample fit as well as out-of-the-sample predictive ability in several dimensions. The FIGARCH model with symmetric and asymmetric NIG errors outperform alternatives both in-sample fit and 1-day and 5-day ahead predictions of the quartiles of the exchange rate return distributions.

Date: 2007
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DOI: 10.2202/1558-3708.1430

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