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Conditional Volatility and Distribution of Exchange Rates: GARCH and FIGARCH Models with NIG Distribution

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  • Kiliç Rehim

    ()
    (Georgia Institute of Technology)

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    Abstract

    This paper extends the Fractionally integrated GARCH (FIGARCH) model by incorporating Normal Inverse Gaussian Distribution (NIG). The proposed model is flexible and allows one to model time-variation, long memory, fat tails as well as asymmetry and skewness in the distribution of financial returns. GARCH and FIGARCH models for daily log exchange rate returns with Normal, Student's t and NIG error distributions as well as GARCH/FIGARCH-in-mean models with t errors are estimated and compared both in terms of sample fit as well as out-of-the-sample predictive ability in several dimensions. The FIGARCH model with symmetric and asymmetric NIG errors outperform alternatives both in-sample fit and 1-day and 5-day ahead predictions of the quartiles of the exchange rate return distributions.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 11 (2007)
    Issue (Month): 3 (September)
    Pages: 1-33

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    Handle: RePEc:bpj:sndecm:v:11:y:2007:i:3:n:1

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    Cited by:
    1. Grier, Kevin B. & Smallwood, Aaron D., 2013. "Exchange rate shocks and trade: A multivariate GARCH-M approach," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 282-305.

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