Forecasting Exchange Rate Volatility: Suggestions for Further Research
Forecasting Exchange Rate Volatility: Suggestions for Further Research

Author(s): Tomáš Plíhal
Subject(s): Methodology and research technology, Policy, planning, forecast and speculation, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: exchange rate volatility; forecasting volatility; GARCH model; HAR-RV model;
Summary/Abstract: The market volatility plays an important role in the world of finance and it is essential part of risk management, asset management and valuation of derivatives. Several models for volatility forecasting exist. The aim of this paper is to provide a theoretical background for further research in forecasting exchange rate volatility. The first part describes essential information about market volatility and its importance. Analysis of commonly used methods for volatility forecasting follows along with a comparison of individual econometric models. Empirical literature, which measures predicting abilities of different models on the real data from the foreign exchange market, is also examined. According to our results, one of the best model for forecasting exchange rate volatility is simple GARCH(1,1) model. However, the latest empirical evidence highlights relatively new HAR-RV model which is able to provide even better results.

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