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A flexible parametric GARCH model with an application to exchange rates

Author

Listed:
  • Kai-Li Wang

    (Department of International Trade, Tam Kang University, Taiwan)

  • Christopher Fawson

    (Department of Economics, 3530 Old Main Hill, Utah State University, Logan, UT 84322)

  • Christopher B. Barrett

    (Department of Applied Economics and Management, 351 Warren Hall, Cornell University, Ithaca, NY 14853-7801, USA)

  • James B. McDonald

    (Department of Economics, 130, FOB, Brigham Young University, Provo, Utah 84602, USA)

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.

Suggested Citation

  • Kai-Li Wang & Christopher Fawson & Christopher B. Barrett & James B. McDonald, 2001. "A flexible parametric GARCH model with an application to exchange rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(4), pages 521-536.
    • Handle: RePEc:jae:japmet:v:16:y:2001:i:4:p:521-536
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