Article2001

A flexible parametric GARCH model with an application to exchange rates

Christopher Fawson · Christopher B. Barrett · James B. McDonald

78 citations0/0 files storedJournal of Applied Econometrics

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Financial Risk and Volatility Modeling Stochastic processes and financial applications Complex Systems and Time Series Analysis

Abstract

Abstract Many asset prices, including exchange rates, exhibit periods of stability punctuated by infrequent, substantial, often one‐sided adjustments. Statistically, this generates empirical distributions of exchange rate changes that exhibit high peaks, long tails, and skewness. This paper introduces a GARCH model, with a flexible parametric error distribution based on the exponential generalized beta (EGB) family of distributions. Applied to daily US dollar exchange rate data for six major currencies, evidence based on a comparison of actual and predicted higher‐order moments and goodness‐of‐fit tests favours the GARCH‐EGB2 model over more conventional GARCH‐t and EGARCH‐t model alternatives, particularly for exchange rate data characterized by skewness. Copyright © 2001 John Wiley & Sons, Ltd.

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References

1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1976Expectations and Exchange Rate Dynamics 1992ARCH modeling in finance 1987Expected stock returns and volatility 1954Essays in Positive Economics 1997Foundations of International Macroeconomics 1979A Model of Balance-of-Payments Crises

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