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Comparison of the EWMA and GARCH Models with Respect to Estimation of the Exchange Rates Volatilities

Author

Listed:
  • Canturk KAYAHAN

    (Afyon Kocatepe University, School of Applied Sciences, Department of Banking and Insurance, Afyonkarahisar, Turkey)

  • Cahit MEMIS

    (Afyon Kocatepe University, School of Applied Sciences, Department of Banking and Insurance, Afyonkarahisar, Turkey)

Abstract

In recent years, the financial system has been evolving and developing at a rapid pace. Both the investors and the other market players aspire to know whether there is volatility in the market and to determine the structure of such fluctuations in case they exist. In addition to this, the accurate volatility estimation models are required to be able to conduct better risk management, portfolio management and option pricing in financial markets. In this context, the field of research in volatility estimation has been developing quickly. Ultimately, whichever is used, the fundamental purpose of volatility prediction models is to accurately estimate volatility. In this study, MA, EWMA, GARCH (1,1) and IGARCH models have been used to conduct volatility predictions with respect to GBP/TRY and EUR/TRY exchange rates between 04.01.2007 and 31.12.2009. ME and RMSE tests have been used to evaluate the reliability levels of the volatility estimates. According to the test results, it has been determined that EWMA model has yielded better estimates than GARCH(1,1) and IGARCH models in terms of estimating the volatilities of exchange rates.

Suggested Citation

  • Canturk KAYAHAN & Cahit MEMIS, 2014. "Comparison of the EWMA and GARCH Models with Respect to Estimation of the Exchange Rates Volatilities," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 1, pages 53-60.
    • Handle: RePEc:ddj:fseeai:y:2014:i:1:p:53-60
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    References listed on IDEAS

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    2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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