TITLE:
Modeling Exchange Rate Dynamics in Egypt: Observed and Unobserved Volatility
AUTHORS:
Dina Rofael, Rana Hosni
KEYWORDS:
Exchange Rate Volatility, GARCH Models, State Space Model, Stochastic Volatility Models, Time-Varying Parameter, Egypt
JOURNAL NAME:
Modern Economy,
Vol.6 No.1,
January
14,
2015
ABSTRACT: The underlying study
focuses on estimating and forecasting the volatility of exchange rate in Egypt
based on ARCH type models and the State Space (SS) models, namely; the
Stochastic Volatility (SV) and the Time-Varying Parameter (TVP) models.
Moreover, the paper tests the predictive power of the conducted models to come
up with a powerful technique that gives the best forward-looking stance of the
exchange rate. Empirically, the paper utilizes daily exchange rate data
spanning from January 2003 till June 2013. Evidently, it is found that the
exchange rate returns in Egypt suffer from the volatility clustering phenomenon
and that there exists a time-varying variance in the exchange rate series that
has to be appropriately dealt with, while modelling nominal exchange rates. Additionally,
with regard to the link between the volatility occurring in the stock market in
Egypt and the volatility of the exchange rate market, it is found that there is
a risk mismatch between the two markets. Therefore, further research is
recommended in the future to suggest other exogenous variables that can help in
explaining the volatility in the exchange rate returns in Egypt.