Estimation of Exchange Rate Volatility using APARCH-type Models: A Case Study of Indonesia (2010–2015)
Abstract
Volatiliy measurement and modeling is an important aspect in many areas of finance. The main purpose of this study is to apply seven APARCH-type models with (1,1) lags to investigate the behavior of exchange rate volatility for the EUR, JPY, and USD selling exchange rates to IDR for the duration from January 2010 to December 2015. The competing models include ARCH, GARCH, TARCH, TS-ARCH, GJR-GARCH, NARCH, and APARCH used with Gaussian normal distribution. In order to estimate the model parameters, this study applies the Bayesian inference using the adaptive random walk Metropolis method in the MCMC algorithm. Empirical results based on the deviance information criterion indicate that the GARCH (1,1), APARCH (1,1), and TARCH (1,1) models provide the best fit for the EUR, JPY, and USD data, respectively. In those models, both the JPY and USD data have significant negative leverage effect at the 99% credible level. Moreover, the JPY returns also have significant Taylor effect in return volatility at the 99% credible level.
Keywords: APARCH, ARWM, IDR exchange rate, MCMC, volatility
JEL Classification: C30, F31
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DOI: http://dx.doi.org/10.17977/um002v9i12017p065
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