MODELLING EXCHANGE-RATE VOLATILITY WITH COMMODITY PRICES

Sailesh Bhaghoe and Gavin Ooft
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Sailesh Bhaghoe: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

No 165, Studies in Applied Economics from The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

Abstract: This paper estimates a model of exchange-rate volatility that includes commodity prices as an exogenous determinant. We apply this model to the mining-based economy of Suriname. Fluctuations of the exchange rate are detrimental for the economy. This was evident in 2015 and 2016 when the economy of Suriname considerably contracted due to persistent negative commodity price shocks. First, we calibrate higher order General Autoregressive Conditional Heteroscedastic (GARCH) models to model the conditional variances of the exchange rate with available monthly data for the period 1994 to 2019. We obtained useful results from Exponential, Asymmetric, Threshold, Component and combined Mean-GARCH models calibrated with standardized error distributions. Then, we perform in-sample forecasts with the calibrated models for the period 2012 to 2019. Lastly, we select the best-performing models to forecast conditional variances of the exchange rate.

Keywords: Exchange Rate Volatility; GARCH models; Heteroscedasticity (search for similar items in EconPapers)
JEL-codes: C52 E44 E47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2020-10
New Economics Papers: this item is included in nep-ets, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jhisae:0165

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