Abstract

This paper extends the Fractionally integrated GARCH (FIGARCH) model by incorporating Normal Inverse Gaussian Distribution (NIG). The proposed model is flexible and allows one to model time-variation, long memory, fat tails as well as asymmetry and skewness in the distribution of financial returns. GARCH and FIGARCH models for daily log exchange rate returns with Normal, Student's t and NIG error distributions as well as GARCH/FIGARCH-in-mean models with t errors are estimated and compared both in terms of sample fit as well as out-of-the-sample predictive ability in several dimensions. The FIGARCH model with symmetric and asymmetric NIG errors outperform alternatives both in-sample fit and 1-day and 5-day ahead predictions of the quartiles of the exchange rate return distributions.

Recommended Citation

Rehim Kiliç (2007) "Conditional Volatility and Distribution of Exchange Rates: GARCH and FIGARCH Models with NIG Distribution", Studies in Nonlinear Dynamics & Econometrics: Vol. 11: No. 3, Article 1.
http://www.bepress.com/snde/vol11/iss3/art1

Related Files

kilic_datacode.zip (159 kB)
Data and code