Modelling exchange rate volatility using GARCH models

English (OpenAlex)

This paper aims to model the volatility of USD and EUR exchange rates against TRY for the period from January 2005 to December 2019 using the Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models. Both symmetric and asymmetric models have been applied to measure factors that are related to the exchange rate returns such as leverage effect and volatility clustering. The symmetric GARCH (1,1) model and the asymmetric EGARCH (1,1), GJR-GARCH (1,1), and PGARCH (1,1) have been applied to each currency against TRY. The results of this paper conclude that the most adequate model for estimating volatility of the USD/TRY exchange rates are the symmetric GARCH (1,1) and asymmetric GJR-GARCH (1,1) models. Moreover in USD/TRY returns, GARCH (1,1) and GJR-GARCH (1,1) models are the most appropriate models along with PGARCH (1,1) in EUR/TRY as well. Regarding forecasting volatility, Root Mean Square Error (RMSE), Mean Absolute Error (MAE) and Mean Absolute Percentage Error (MAPE) tests have been used. Based on the results, the static forecast of GJR-GARCH (1,1) is the best model in predicting the future pattern for both USD and EUR.