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Structural breaks and GARCH models of exchange rate volatility

โœ Scribed by David E. Rapach; Jack K. Strauss

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
360 KB
Volume
23
Category
Article
ISSN
0883-7252

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โœฆ Synopsis

Abstract

We investigate the empirical relevance of structural breaks for GARCH models of exchange rate volatility using both inโ€sample and outโ€ofโ€sample tests. We find significant evidence of structural breaks in the unconditional variance of seven of eight US dollar exchange rate return series over the 1980โ€“2005 periodโ€”implying unstable GARCH processes for these exchange ratesโ€”and GARCH(1,1) parameter estimates often vary substantially across the subsamples defined by the structural breaks. We also find that it almost always pays to allow for structural breaks when forecasting exchange rate return volatility in real time. Combining forecasts from different models that accommodate structural breaks in volatility in various ways appears to offer a reliable method for improving volatility forecast accuracy given the uncertainty surrounding the timing and size of the structural breaks. Copyright ยฉ 2008 John Wiley & Sons, Ltd.

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