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Energy Market Uncertainties and Exchange Rate Volatility: A GARCH-MIDAS Approach

Author

Listed:
  • Afees A. Salisu

    (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Ahamuefula E. Ogbonna

    (Centre for Econometrics & Applied Research, Ibadan, Nigeria)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Qiang Ji

    (Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China)

Abstract

In this paper, we employ the generalized autoregressive conditional heteroscedasticity-mixed data sampling (GARCH-MIDAS) framework to forecast the daily volatility of 19 dollar-based exchange rate returns based on monthly metrics of oil price uncertainty (OPU), and relatively broader global and country-specific energy market-related uncertainty indexes (EUI) over the daily period of January, 1996 to September, 2022. We find that the global EUIs tend to perform better than the OPU, in terms of their respective GARCH-MIDAS-based forecast performances relative to the benchmark (GARCH-MIDAS-realized volatility (RV)) model, highlighting the need to look beyond the oil market to capture energy related uncertainties. This line of reasoning is further enhanced when we observe the relative (to the United States) country-specific EUIs to outperform the benchmark in a statistically significant manner for at least 14 currencies across the short-, medium-, and long-term forecasting horizons. Our findings have important implications for currency traders.

Suggested Citation

  • Afees A. Salisu & Ahamuefula E. Ogbonna & Rangan Gupta & Qiang Ji, 2024. "Energy Market Uncertainties and Exchange Rate Volatility: A GARCH-MIDAS Approach," Working Papers 202418, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202418
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    More about this item

    Keywords

    Monthly Oil Price and Energy Market Uncertainties; Daily Exchange Rate Returns Volatility; GARCH-MIDAS; Forecasting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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