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Modeling and Forecasting of British Pound/US Dollar Exchange Rate: An Empirical Analysis

In: Advances in Panel Data Analysis in Applied Economic Research

Author

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  • Chaido Dritsaki

    (Western Macedonia University of Applied Sciences)

Abstract

The aim of this paper is to develop and examine the characteristics of volatility of exchange rate on British pound/US dollar, using symmetric and asymmetric GARCH(p,q) models. Given that there are ARCH effects on exchange rate returns, we estimated ARCH(q), GARCH(p,q), and EGARCH(p,q) including these effects on mean equation. These models were estimated with maximum likelihood method using the following distributions: normal, t-Student, and generalized error distribution. The log-likelihood function was maximized using Marquardt’s algorithm (1963) in order to search for optimal parameters. The results showed that ARIMA(0,0,1)-EGARCH(1,1) model with t-Student distribution is the best in order to describe exchange rate returns and also captures the leverage effect. Finally, for the forecasting of ARIMA(0,0,1)-EGARCH(1,1) model, both the dynamic and static procedures are used. The static procedure provides better results on the forecasting rather than the dynamic.

Suggested Citation

  • Chaido Dritsaki, 2018. "Modeling and Forecasting of British Pound/US Dollar Exchange Rate: An Empirical Analysis," Springer Proceedings in Business and Economics, in: Nicholas Tsounis & Aspasia Vlachvei (ed.), Advances in Panel Data Analysis in Applied Economic Research, chapter 0, pages 437-455, Springer.
    • Handle: RePEc:spr:prbchp:978-3-319-70055-7_35
    DOI: 10.1007/978-3-319-70055-7_35
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    Cited by:

    1. Nyoni, Thabani, 2018. "Modeling and Forecasting Inflation in Zimbabwe: a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) approach," MPRA Paper 88132, University Library of Munich, Germany.
    2. Paul J. J. Welfens & Tian Xiong, 2019. "BREXIT perspectives: financial market dynamics, welfare aspects and problems from slower growth," International Economics and Economic Policy, Springer, vol. 16(1), pages 215-265, March.

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