Modeling the Volatility of Ethiopian Birr
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Date
2013-06
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Addis Ababa University
Abstract
Volatility models cover a wide range of topics in econometrics and Statistics. They are
broadly divided in to two categories: ARCH type and SV models based on the
determination of variance at time (t-I) having all information at time t. The objective of
this study is modeling the volati lity of exchange rate of ETB deterministically and
stochastically using ARCH type and SV models, respectively. ARCH type volati lity
models are considered as deterministic whereas SV models are stochastic. The data series
used for the study is obtained from the NBE from February 2, 2001 to March 15 , 20 13
and consists of about 3092 dai ly observations. The major currencies selected for the study
based on the availability of data documentation were: EURO, GBP and USD FOREX
rate per ETB. A variety of time series models such as ARCH (1), ARCH (2), sGARCH
(1 , 1); EGARCH (1 , I), APARCH (1 , 1) and basic SV model were estimated. The models
used for the analysis were selected based on their performance reflected in the literature
of econometrics and Statistics. Among the major currencies selected for the study; a
EURO FOREX rate failed to pass the ARCH effect test and model estimation was done
only for GBP and USD FOREX rate. The results of the study indicate that sGARCH (I,
I) outperforms other ARCH type time series models for modeling the volatility of
exchange rate of ETB per major currencies (GBP and USD). Furthermore, SV model was
modeled alone without any comparison for both currencies return. SV model fulfilled all
the basic assllmptions and can be a candidate for fitting the volatility of GBP and USD
return series per ETB.
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Volatility of Ethiopian Birr