Forecasting the Volatility of Ethiopian Birr/Euro Exchange Rate Using Garch-Type Models

Desa Daba Fufa () and Belianeh Legesse Zeleke
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Desa Daba Fufa: Haramaya University
Belianeh Legesse Zeleke: Haramaya University

Annals of Data Science, 2018, vol. 5, issue 4, No 3, 529-547

Abstract: Abstract This paper provides a robust analysis of volatility forecasting of Euro-ETB exchange rate using weekly data spanning the period January 3, 2000–December 2, 2015. The forecasting performance of various GARCH-type models is investigated based on forecasting performance criteria such as MSE and MAE based tests, and alternative measures of realized volatility. To our knowledge, this is the first study that focuses on Euro-ETB exchange rate using high frequency data, and a range of econometric models and forecast performance criteria. The empirical results indicate that the Euro-ETB exchange rate series exhibits persistent volatility clustering over the study period. We document evidence that ARCH (8), GARCH (1, 1), EGARCH (1, 1) and GJR-GARCH (2, 2) models with normal distribution, student’s-t distribution and GED are the best in-sample estimation models in terms of the volatility behavior of the series. Amongst these models, GJR-GARCH (2, 2) and GARCH (1, 1) with students t-distribution are found to perform best in terms of one step-ahead forecasting based on realized volatility calculated from the underlying daily data and squared weekly first differenced of the logarithm of the series, respectively. A one-step-ahead forecasted conditional variance of weekly Euro-ETB exchange rate portrays large spikes around 2010 and it is evident that weekly Euro-ETB exchange rate are volatile. This large spikes indicates that devaluation of Ethiopian birr against the Euro. This volatility behavior may affects the International Foreign Investment and trade balance of the country. Therefore, GJR-GARCH (2, 2) with student’s t-distribution is the best model both interms of the stylized facts and forecasting performance of the volatility of Ethiopian Birr/Euro exchange rate among others.

Keywords: Forecasting; Volatility; ARCH; EGARCH; GJR-GARCH model; Volatility clustering (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s40745-018-0151-6

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