Can economic policy uncertainty predict exchange rate volatility? New evidence from the GARCH-MIDAS model

Zhongbao Zhou, Zhangyan Fu, Yong Jiang, Ximei Zeng and Ling Lin

Finance Research Letters, 2020, vol. 34, issue C

Abstract: This paper investigates the impact of relative economic policy uncertainty between China and the United States (the Sino-US EPU ratio) on the Chinese exchange rate volatility by employing a GARCH-MIDAS model. Moreover, we compare the out-of-sample volatility forecasting performance of the GARCH-MIDAS model with that of traditional GARCH-type models. The empirical results suggest that: (i) the Sino-US EPU ratio has a positive impact on the long-term volatility of the Chinese exchange rate, (ii) the GARCH-MIDAS model performs better than the traditional GARCH-type models.

Keywords: Economic policy uncertainty; Chinese exchange rate volatility; GARCH-MIDAS model; Forecasting (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319304982

DOI: 10.1016/j.frl.2019.08.006

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