Modeling and Forecasting USD/UGX Volatility through GARCH Family Models: Evidence from Gaussian, T and GED Distributions


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Erkekoğlu H. , Majok G. A. P. , Deng A. S.

International Journal of Economics and Financial Issues, cilt.10, sa.2, ss.268-281, 2020 (Diğer Kurumların Hakemli Dergileri)

  • Cilt numarası: 10 Konu: 2
  • Basım Tarihi: 2020
  • Doi Numarası: 10.32479/ijefi.9016
  • Dergi Adı: International Journal of Economics and Financial Issues
  • Sayfa Sayıları: ss.268-281

Özet

Symmetric and asymmetric GARCH models-GARCH (1,1), PARCH (1,1), EGARCH (1,1), TARCH (1,1) and IGARCH (1,1) were used to examine stylized facts of daily USD/UGX return series from September 01, 2005 to August 30, 2018. Modeling and forecasting were performed based on Gaussian, Student’s t and GED distribution densities to identify the best distribution for examining stylized facts about the volatility of returns. Initial tests of heteroscedasticity (ARCH-LM), autocorrelation and stationarity were carried out to establish specific data requirements before modeling. Results for conditional variance indicated the presence of significant asymmetries, volatility clustering, leptokurtic distribution, and leverage effects. Effectively, PARCH (1,1) under GED distribution provided highly significant results free from serial correlation and ARCH effects, thus revealing the asymmetric responsiveness and persistence to shocks. Forecasting was performed across distributions and assessed based on symmetric lost functions (RMSE, MAE, MAPE and Thiel’s U) and information criteria (AIC, SBC and Loglikelihood). Information criteria offered preference for EGARCH (1,1) under GED distribution while symmetric lost functions provided very competitive choices with very slight precedence for GARCH (1,1) and EGARCH (1,1) under GED distribution. Following these results, we recommend PARCH (1,1) and EGARCH (1,1) for modeling and forecasting volatility with preference to GED distribution. Given the asymmetric responsiveness and persistence of conditional variance, macroeconomic fiscal adjustments in addition to stabilization of the internal political environment are advised for Uganda.

Keywords: Forecasting Volatility, GARCH Family Models, Probability Distribution Density, Forecast Accuracy