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Modelling Exchange-Rate Volatility With Commodity Prices

Author

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  • Bhaghoe, Sailesh

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

  • Ooft, Gavin

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

Abstract

This paper estimates a model of exchange-rate volatility that includes commodity prices as an exogenous determinant. We apply this model to the mining-based economy of Suriname. Fluctuations of the exchange rate are detrimental for the economy. This was evident in 2015 and 2016 when the economy of Suriname considerably contracted due to persistent negative commodity price shocks. First, we calibrate higher order General Autoregressive Conditional Heteroscedastic (GARCH) models to model the conditional variances of the exchange rate with available monthly data for the period 1994 to 2019. We obtained useful results from Exponential, Asymmetric, Threshold, Component and combined Mean-GARCH models calibrated with standardized error distributions. Then, we perform in-sample forecasts with the calibrated models for the period 2012 to 2019. Lastly, we select the best-performing models to forecast conditional variances of the exchange rate.

Suggested Citation

  • Bhaghoe, Sailesh & Ooft, Gavin, 2020. "Modelling Exchange-Rate Volatility With Commodity Prices," Studies in Applied Economics 165, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    • Handle: RePEc:ris:jhisae:0165
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    More about this item

    Keywords

    Exchange Rate Volatility; GARCH models; Heteroscedasticity;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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