Modelling volatility in the currency using stochastic models (GARCH and EGARCH)
Date
2021
Authors
Mwania, Richard Emmanuel
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
This study looks into modelling variations in the rate of exchange by
utilizing stochastic models. To do this, there are two models we focused on.
The two models that are utilized in this study are the GARCH model and the
EGARCH model. First, we test for thepresence of arch effects in order to
know whether these models would be applicable in modelling the volatility
of the exchange rates. In addition, for us to 'know whieh order of GARCH
and EGARCH model to use, we com.pared the information criteria for the
differentorder·GARCH and·EGARCH models and -chose the one which had
the smallest information criteria.
From the results we obtained by modelling volatility using both the GARCH
and EGARCH models, we notice that the EGARCH model gives us superior
results when compared to GARCH. This is because there is presence of
asyrrimetric effects when modelling volatility of the exchange rates which is
evident by the gamma coefficient being statistically significant. Hence,
EGARCH .is preferred when modelling volatility in the exchange rates of the
currencies
Description
Submitted in partial fuHilment of the requirements for the Degree of Bachelor of Business Science in Financial Economics at Strathmore University.