ARCHIVES
VOL. 8, ISSUE 9 (2021)
Comparison of multivariate GARCH models using volatility of EUR/ETB and USD/ETB exchange rates in Ethiopia
Authors
Tesfaye Denano, Sintayehu Sibera
Abstract
The price at which two distinct countries' currencies are traded varies in terms of volatility of exchange rate. Because exchange rate volatility is associated with risk and uncertainty, it is a major source of concern for macroeconomic policymakers. The main objective of this study was comparison of MGARCH models using volatility of daily Euro/Ethiopian birr and USD/ETB in Ethiopia. Secondary data were obtained from nation bank of Ethiopia and the sample data period runs from March 1, 2016 to February 24, 2020. The main variables considered under this study were USD/ETB and Euro/ETB daily exchange rates. There are 1,287 time series observations included and exclude Saturday and Sunday data from this study. Four types of multivariate GARCH models estimated in this study; namely: Constant Conditional Correlation (CCC), Dynamic Conditional Covariance (DCC), Dvech and Baba, Engle, Kraft and Kroner (BEKK) MGARCH models. The stationarity of sample data checked by Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) test and the series were stationary after logarithm of first differenced. From estimated evidence that CCC-MGARCH (1, 2), DCC-MGARCH (1, 2), Dvech-MGARCH (1, 1) and BEKK-MGARCH (1, 1) models with Gaussian, student’s-t and skew student’s t-distribution are the best estimation models in terms of the volatility behavior of the series. Amongst these models, DCC-MGARCH (1, 2) with minimum value of information criteria and log-likelihood function was found to perform best in term of fit the volatility of Ethiopian Birr/USD and ETB/EUR. Hence, we recommend that future research works need to build on the current work and extend it a bit further currencies and models. For example, it would be interesting to consider fitting other MGARCH models of the major with other currencies the country uses in its international transactions.
Download
Pages:65-74
How to cite this article:
Tesfaye Denano, Sintayehu Sibera "Comparison of multivariate GARCH models using volatility of EUR/ETB and USD/ETB exchange rates in Ethiopia ". International Journal of Multidisciplinary Research and Development, Vol 8, Issue 9, 2021, Pages 65-74
Download Author Certificate
Please enter the email address corresponding to this article submission to download your certificate.