Forecasting risk in the US Dollar exchange rate under volatility shifts

Hassan Anjum and Farooq Malik

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: Recent evidence suggests that volatility shifts (i.e. structural breaks in volatility) in returns increases kurtosis which significantly contributes to the observed non-normality in market returns. In this paper, we endogenously detect significant shifts in the volatility of US Dollar exchange rate and incorporate this information to estimate Value-at-Risk (VaR) to forecast large declines in the US Dollar exchange rate. Our out-of-sample performance results indicate that a GARCH model with volatility shifts produces the most accurate VaR forecast relative to several benchmark methods. Our contribution is important as changes in US Dollar exchange rate have a substantial impact on the global economy and financial markets.

Keywords: Exchange rate volatility; Structural breaks; GARCH (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301546

DOI: 10.1016/j.najef.2020.101257

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