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A flexible parametric GARCH model with an application to exchange rates

✍ Scribed by Kai-Li Wang; Christopher Fawson; Christopher B. Barrett; James B. McDonald

Publisher: John Wiley and Sons
Year: 2001
Tongue: English
Weight: 132 KB
Volume: 16
Category: Article
ISSN: 0883-7252
DOI: 10.1002/jae.606

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✦ Synopsis

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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