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The underlying studyfocuses on estimating and forecasting the volatility of exchange rate in Egyptbased on ARCH type models and the State Space SS models, namely; theStochastic Volatility SV and the Time-Varying Parameter TVP models.Moreover, the paper tests the predictive power of the conducted models to comeup with a powerful technique that gives the best forward-looking stance of theexchange rate. Empirically, the paper utilizes daily exchange rate dataspanning from January 2003 till June 2013. Evidently, it is found that theexchange rate returns in Egypt suffer from the volatility clustering phenomenonand that there exists a time-varying variance in the exchange rate series thathas to be appropriately dealt with, while modelling nominal exchange rates. Additionally,with regard to the link between the volatility occurring in the stock market inEgypt and the volatility of the exchange rate market, it is found that there isa risk mismatch between the two markets. Therefore, further research isrecommended in the future to suggest other exogenous variables that can help inexplaining the volatility in the exchange rate returns in Egypt.


Exchange Rate Volatility, GARCH Models, State Space Model, Stochastic Volatility Models, Time-Varying Parameter, Egypt

Cite this paper

Rofael, D. and Hosni, R. 2015 Modeling Exchange Rate Dynamics in Egypt: Observed and Unobserved Volatility. Modern Economy, 6, 65-80. doi: 10.4236-me.2015.61006.

Autor: Dina Rofael1, Rana Hosni2



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