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Can economic policy uncertainty predict exchange rate volatility? New evidence from the GARCH-MIDAS model

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  • Zhou, Zhongbao
  • Fu, Zhangyan
  • Jiang, Yong
  • Zeng, Ximei
  • Lin, Ling

Abstract

This paper investigates the impact of relative economic policy uncertainty between China and the United States (the Sino-US EPU ratio) on the Chinese exchange rate volatility by employing a GARCH-MIDAS model. Moreover, we compare the out-of-sample volatility forecasting performance of the GARCH-MIDAS model with that of traditional GARCH-type models. The empirical results suggest that: (i) the Sino-US EPU ratio has a positive impact on the long-term volatility of the Chinese exchange rate, (ii) the GARCH-MIDAS model performs better than the traditional GARCH-type models.

Suggested Citation

  • Zhou, Zhongbao & Fu, Zhangyan & Jiang, Yong & Zeng, Ximei & Lin, Ling, 2020. "Can economic policy uncertainty predict exchange rate volatility? New evidence from the GARCH-MIDAS model," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319304982
    DOI: 10.1016/j.frl.2019.08.006
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