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One-Step-Ahead Forecastability of GARCH (1,1): A Comparative Analysis of USD- and PKR-Based Exchange Rate Volatilities

Author

Listed:
  • Abdul Jalil Khan

    () (PhD Scholar, Government College University, Lahore, Pakistan.)

  • Parvez Azim

    () (Dean, Faculty of Arts and Social Sciences, Government College University, Faisalabad, Pakistan.)

Abstract

This study aims to capture volatility patterns using GARCH (1,1) models. It evaluates these models to obtain one-step-ahead forecastabilities by employing four major forecasting evaluation criteria, and compares two different currencies— the Pakistan rupee and the US dollar—as domestic and foreign currency-valued exchange rates, respectively. The results show that using an international vehicle currency is favorable in Pakistan’s context. However, the Kuwaiti dinar, Canadian dollar, US dollar, Singapore dollar, HongKong dollar, and Malaysian ringgit are found to be preferable when performing direct international transactions. Using the root mean square errors and mean absolute errors techniques, the study also assess the robustness of measuring one-step-ahead forecasts.

Suggested Citation

  • Abdul Jalil Khan & Parvez Azim, 2013. "One-Step-Ahead Forecastability of GARCH (1,1): A Comparative Analysis of USD- and PKR-Based Exchange Rate Volatilities," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 1-38, Jan-June.
  • Handle: RePEc:lje:journl:v:18:y:2013:i:1:p:1-38
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    More about this item

    Keywords

    Time series analysis; GARCH models; foreign exchange markets; forecasting; exchange rate volatility; Pakistan.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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