One-Step-Ahead Forecastability of GARCH (1,1): A Comparative Analysis of USD- and PKR-Based Exchange Rate Volatilities

Abdul Khan () and Parvez Azim ()
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Parvez Azim: Dean, Faculty of Arts and Social Sciences, Government College University, Faisalabad, Pakistan.

Lahore Journal of Economics, 2013, vol. 18, issue 1, 1-38

Abstract: This study aims to capture volatility patterns using GARCH (1,1) models. It evaluates these models to obtain one-step-ahead forecastabilities by employing four major forecasting evaluation criteria, and compares two different currencies— the Pakistan rupee and the US dollar—as domestic and foreign currency-valued exchange rates, respectively. The results show that using an international vehicle currency is favorable in Pakistan’s context. However, the Kuwaiti dinar, Canadian dollar, US dollar, Singapore dollar, HongKong dollar, and Malaysian ringgit are found to be preferable when performing direct international transactions. Using the root mean square errors and mean absolute errors techniques, the study also assess the robustness of measuring one-step-ahead forecasts.

Keywords: Time series analysis; GARCH models; foreign exchange markets; forecasting; exchange rate volatility; Pakistan. (search for similar items in EconPapers)
JEL-codes: C22 C53 F31 F37 F44 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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