Forecasting RMB exchange rate volatility: do time-varying higher moments and time-varying risk aversion help?

Xinyu Wu, Xueting Mei and Li Liu

Applied Economics Letters, 2024, vol. 31, issue 8, 757-767

Abstract: In this paper, we investigate the predictive value of time-varying higher moments and time-varying risk aversion (RA) for the RMB exchange rate volatility. To do so, we develop a threshold GARCH-MIDAS model with skewness and kurtosis (henceforth TGARCH-MIDAS-SK model). Our empirical results indicate the presence of significant reverse leverage effect and time-varying skewness and kurtosis in the RMB exchange rate returns. The RA has a significant negative impact on the RMB exchange rate volatility. Moreover, we observe that incorporating leverage effect, time-varying higher moments and RA improves the in-sample fitting and out-of-sample forecasting performance of the model.

Date: 2024
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DOI: 10.1080/13504851.2022.2146648

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