Modeling and predicting historical volatility in exchange rate markets

Salim Lahmiri

Physica A: Statistical Mechanics and its Applications, 2017, vol. 471, issue C, 387-395

Abstract: Volatility modeling and forecasting of currency exchange rate is an important task in several business risk management tasks; including treasury risk management, derivatives pricing, and portfolio risk evaluation. The purpose of this study is to present a simple and effective approach for predicting historical volatility of currency exchange rate. The approach is based on a limited set of technical indicators as inputs to the artificial neural networks (ANN). To show the effectiveness of the proposed approach, it was applied to forecast US/Canada and US/Euro exchange rates volatilities. The forecasting results show that our simple approach outperformed the conventional GARCH and EGARCH with different distribution assumptions, and also the hybrid GARCH and EGARCH with ANN in terms of mean absolute error, mean of squared errors, and Theil’s inequality coefficient. Because of the simplicity and effectiveness of the approach, it is promising for US currency volatility prediction tasks.

Keywords: Historical volatility; GARCH family; Exchange rate; Forecasting; Neural networks (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:471:y:2017:i:c:p:387-395

DOI: 10.1016/j.physa.2016.12.061

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