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 language | English (US) |
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Article number | 101257 |
Journal | North American Journal of Economics and Finance |
Volume | 54 |
DOIs | |
State | Published - Nov 2020 |
Externally published | Yes |
Keywords
- Exchange rate volatility
- GARCH
- Structural breaks
ASJC Scopus subject areas
- Finance
- Economics and Econometrics