Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis

Emmanuel Afuecheta, Idika E. Okorie, Saralees Nadarajah () and Geraldine E. Nzeribe
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Emmanuel Afuecheta: King Fahd University of Petroleum and Minerals
Idika E. Okorie: Khalifa University
Saralees Nadarajah: University of Manchester
Geraldine E. Nzeribe: Nnamdi Azikiwe University

Computational Economics, 2024, vol. 63, issue 1, No 11, 304 pages

Abstract: Abstract Research on the exchange rate volatility and dynamic conditional correlation of African currencies/financial markets interdependence appears to be limited. In this paper, we employ GARCH models to characterize the exchange rate volatility of eight major African currencies. The variation of interdependence with respect to time is described using the DCC-GARCH model. From the results of the DCC, remarkable variations in correlations through time across these countries are observed with the correlations varying from low to moderate, suggesting that African economies are generally governed by certain economic factors and are vastly regulated. These regulations, including exchange rate misalignment led to sluggish and negative growth in most of the African countries. For instance, persistent misalignment can cause high levels of inflation, for example, undervaluation. Overvaluation can lead to trade imbalances and they can in turn create macroeconomic instability and balance of payment problems. Given these results, we suggest that policy makers should revamp and adopt state resilience so as to reduce the negative effect of exchange rate misalignment on economic growth.

Keywords: Asymmetric Student’s t distribution; Generalized hyperbolic distribution; Maximum likelihood; Student’s t distribution (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-022-10340-9

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