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Structural breaks and GARCH models of exchange rate volatility

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Author Info
David E. Rapach (Department of Economics, Saint Louis University, Saint Louis, Missouri, USA)
Jack K. Strauss (Department of Economics, Saint Louis University, Saint Louis, Missouri, USA)
Abstract

We investigate the empirical relevance of structural breaks for GARCH models of exchange rate volatility using both in-sample and out-of-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 1980-2005 period-implying unstable GARCH processes for these exchange rates-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 © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.976
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 65-90
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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:65-90

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. WenShwo Fang & Stephen M. Miller, 2008. "Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited," Working papers 2008-47, University of Connecticut, Department of Economics. [Downloadable!]
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  2. repec:mop:credwp:09.07.85 is not listed on IDEAS
    Other versions:
  3. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2009. "Options Introduction and Volatility in the EU ETS," Working Papers halshs-00405709_v1, HAL. [Downloadable!]
  4. Carmen Broto, 2008. "Inflation targeting in Latin America: Empirical analysis using GARCH models," Banco de España Working Papers 0826, Banco de España. [Downloadable!]
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