Comparative Analysis of Naira/US Dollar Exchange Rate Volatility using GARCH Variant Modeling
Abstract
This paper employed GARCH variant models to examine the return volatilities of official bank, interbank and Bureau de change rates. Using the monthly exchange rate of Naira/USD from January 2004 to September 2020 (2004:1- 2020:9), it was observed that the returns were not normally distributed and were stationary at level. The power statistics of Ljung-Box Q and Ljung-Box Q2 transformed, using the powers 0.25, 0.5 and 0.75 for conditional heteroscedasticity at lags 6, 12 and 20 to indicate conditional heteroscedascity in all returns. The study also found exchange rate volatility in official, interbank and Bureau de change returns were persistent. However, Bureau de change return was relatively more persistent while official exchange rate return was the least persistent. Also, it can be said that leverage effect exists in all the three exchange rate returns; while asymmetric model was the best model to estimate the exchange rate return, IGARCH was not a suitable model to estimate the exchange rate return in Nigeria. There is a need to incorporate the impact of news when developing an exchange rate policy by monetary authority in Nigeria.
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Copyright (c) 2021 Agya Atabani Adi
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