Modeling time-dependent volatility of the USD-KSH exchange rate in the presence of speculation

Abstract

Financial markets serve as platforms for the exchange of diverse financial assets like stocks, bonds, currencies, derivatives, and commodities. Their core functions encompass capital allocation, price discovery, and liquidity enhancement. However, market stability is frequently disrupted by speculation. Speculation refers to trading activities driven by expectations of future short-term price changes, rather than the underlying value of an asset (Bachelier, 1900).