PROBLEMS IN ESTIMATION OF VARIANCE MODEL FOR WORLD CURRENCY EXCHANGE RATES
PROBLEMS IN ESTIMATION OF VARIANCE MODEL FOR WORLD CURRENCY EXCHANGE RATES
Abstract
This article presents four ARCH/GARCH models for modeling of the
variance of ten currency exchange rates. The main statistical characteristics of this type of
financial instruments, observed by the researchers, are: low or non-significant
autocorrelation in the returns, significant autocorrelation in squared returns, long-term
memory of the variance, fat tails. The evaluation of the models indicates that not all of the
currency pairs can be modeled correctly with the presented models as close to nonstationary processes are observed, which is not a realistic theoretical set-up
References
Generalized Autoregressive Conditional Heteroskedasticity,”Journal of Econometrics, 74,
3–30.
2. Bollerslev, T. (1986): “Generalized Autoregressive Conditional
Heteroskedasticity,” Journal of Econometrics, 31, 307–327.
3. Bollerslev, T., R. Y. Chou, and K. F. Kroner (1992): “ARCH Modeling in Finance:
A Review of the Theory and Empirical Evidence,” Journal of Econometrics, 52, 5–59.
4. Bollerslev, T., and J. M. Wooldridge (1992): “Quasi-maximum Likelihood
Estimation and Inference in Dynamic Models with Time-varying Covariances,”
Econometric Reviews, 11, 143–172.
5. Engle, R. F. (1982): “Autoregressive Conditional Heteroscedasticity with
Estimates of the Variance of United Kingdom Inflation,” Econometrica, 50, 987–1007.
6. Engle, R. F. and T. Bollerslev (1986): “Modelling the persistence of conditional
variances,” Econometric Reviews, 5, 1-50.
7. Glosten, L. R., R. Jagannathan, and D. E. Runkle (1993): “On the Relation
Between Expected Value and the Volatility of the Nominal Excess Return on Stocks,”
Journal of Finance, 48, 1779–1801.
8. Nelson, D.B. (1991): „Conditional heteroskedasticity in asset returns: a new
approach,” Econometrica 59, 347–370.
9. Weiss, A. A. (1986): “Asymptotic Theory for ARCH Models: Estimation and
Testing,” Econometric Theory, 2, 107–131.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
By submitting a paper for publishing the authors hereby comply with the following provisions: 1. The authors retain the copyrights and only give the journal the right for first publication while licensing the work under Creative Commons Attribution License, which grants permissions to others to share the contribution citing this journal as first publication of the text. 2. The authors may enter separate, additional contractual relations for non-exclusive distribution of the published version of the work in this journal (e.g. to upload it in an institutional depository, or to be published in a book), given that they cite the first publication in this journal. 3. The authors are allowed and are encouraged to publish their works online (e.g. to upload it in an institutional depository, personal websites, social networks, etc.) before, during, and after the submission of the paper here, because this may lead to productive exchange, as well as earlier and larger referencing of the published works (see The Effect of Open Access).
