Generalized asymmetric power ARCH modelling of exchange rate volatility

Michael D. McKenzie · Heather Eunice Mitchell

68 citations0/0 files storedApplied Financial Economics

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Financial Risk and Volatility Modeling Stochastic processes and financial applications Market Dynamics and Volatility

Abstract

This paper considers the ability of the power ARCH model to capture the stylized features of volatility in 17 heavily traded bilateral exchange rates. This power ARCH model nests a number of models from the ARCH family. The relative merits of these nested ARCH models can be considered using the standard log likelihood ratio test. The results of this paper suggest that in the presence of symmetric responses to innovations in the market, the GARCH(1,1) model is preferred. Where asymmetry is present, than the inclusion of a leverage term is worthwhile as long as a power term is also included.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1993On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks 1965The Behavior of Stock-Market Prices 1963The Variation of Certain Speculative Prices 1997The variation of certain speculative prices 1990Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized Arch Model 1993A long memory property of stock market returns and a new model

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