Forecasting risk in the US Dollar exchange rate under volatility shifts

Hassan Anjum, Farooq Malik

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

Recent evidence suggests that volatility shifts (i.e. structural breaks in volatility) in returns increases kurtosis which significantly contributes to the observed non-normality in market returns. In this paper, we endogenously detect significant shifts in the volatility of US Dollar exchange rate and incorporate this information to estimate Value-at-Risk (VaR) to forecast large declines in the US Dollar exchange rate. Our out-of-sample performance results indicate that a GARCH model with volatility shifts produces the most accurate VaR forecast relative to several benchmark methods. Our contribution is important as changes in US Dollar exchange rate have a substantial impact on the global economy and financial markets.

Original languageEnglish (US)
Article number101257
JournalNorth American Journal of Economics and Finance
Volume54
DOIs
StatePublished - Nov 2020
Externally publishedYes

Keywords

  • Exchange rate volatility
  • GARCH
  • Structural breaks

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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