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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)

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.

Suggested Citation

  • Kiliç Rehim, 2007. "Conditional Volatility and Distribution of Exchange Rates: GARCH and FIGARCH Models with NIG Distribution," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(3), pages 1-33, September.
    • Handle: RePEc:bpj:sndecm:v:11:y:2007:i:3:n:1
    DOI: 10.2202/1558-3708.1430
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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.
    2. He, Xie & Hamori, Shigeyuki, 2021. "Is volatility spillover enough for investor decisions? A new viewpoint from higher moments," Journal of International Money and Finance, Elsevier, vol. 116(C).

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