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Forecasting RMB exchange rate volatility: do time-varying higher moments and time-varying risk aversion help?

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  • Xinyu Wu
  • Xueting Mei
  • Li Liu

Abstract

In this paper, we investigate the predictive value of time-varying higher moments and time-varying risk aversion (RA) for the RMB exchange rate volatility. To do so, we develop a threshold GARCH-MIDAS model with skewness and kurtosis (henceforth TGARCH-MIDAS-SK model). Our empirical results indicate the presence of significant reverse leverage effect and time-varying skewness and kurtosis in the RMB exchange rate returns. The RA has a significant negative impact on the RMB exchange rate volatility. Moreover, we observe that incorporating leverage effect, time-varying higher moments and RA improves the in-sample fitting and out-of-sample forecasting performance of the model.

Suggested Citation

  • Xinyu Wu & Xueting Mei & Li Liu, 2024. "Forecasting RMB exchange rate volatility: do time-varying higher moments and time-varying risk aversion help?," Applied Economics Letters, Taylor & Francis Journals, vol. 31(8), pages 757-767, May.
    • Handle: RePEc:taf:apeclt:v:31:y:2024:i:8:p:757-767
    DOI: 10.1080/13504851.2022.2146648
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