Forecasting exchange rate volatility: GARCH models versus implied volatility forecasts

Pilbeam, K. & Langeland, K. N. (2014). Forecasting exchange rate volatility: GARCH models versus implied volatility forecasts. International Economics and Economic Policy, doi: 10.1007/s10368-014-0289-4

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Abstract

This study investigates whether different specifications of univariate GARCH models can usefully forecast volatility in the foreign exchange market. The study compares in-sample forecasts from symmetric and asymmetric GARCH models with the implied volatility derived from currency options for four dollar parities. The data set covers the period 2002 to 2012. We divide the data into two periods one for the period 2002 to 2007 which is characterised by low volatility and the other for the period 2008 to 2012 characterised by high volatility. The results of this paper reveal that the implied volatility forecasts significantly outperforms the three GARCH models in both low and high volatility periods. The results strongly suggest that the foreign exchange market efficiently prices in future volatility.

Item Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/s10368-014-0289-4. Article in press.
Uncontrolled Keywords: Exchange Rate, Volatility Modelling
Subjects: H Social Sciences > HG Finance
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/3810

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