Sterling Pound (Gbp) Exchange-Rate Volatility in the Brexit Context using the Egarch Model - A Comparison between the Effective Gbp Volatility and the Egarch Estimation for the Period June 2016 - September 2019

• Author: Tache I. - Darie F.
• Position: Transilvania University of Brasov - Lucian Blaga University of Sibiu
• Pages: 103-112

Bulletin of the Transilvania University of Braşo v

Series V: Economic Sciences • Vol. 12 (61) No. 2 – 2019

https://doi.org/10.31926/but.es.2019.12.61.2.13

POUND STERLING (GBP) EXCHANGE-RATE

VOLATILITY IN THE BREXIT CONTEXT USING

THE EGARCH MODEL

A COMPARISON BETWEEN THE EFFECTIVE GBP

VOLATILITY AND THE EGARCH ESTIMATION FOR

THE PERIOD JUNE 2016 - SEPTEMBER 2019

I. TACHE1 F. DARIE2

Abstract: This study investigates whether different specifications of

univariate GARCH models can usefully forecast volatility on the foreign

exchange market. The study uses only forecasts from an asymmetric GARCH

model, namely Exponential GARCH (EGARCH) for GBP/USD exchange-rate

and compares the estimates with the volatility for the period June 2016 to

September 2019. The dataset is obtained from “Investing.com” and covers

the period between June 2016 - September 2019. The data encompasses the

slump of the GBP to a 31-year low due to a major political crisis in the United

Kingdom. Besides averting the decision-making factors about the worrying

consequences of Brexit, this paper reaches the conclusion that the EGARCH

model could be used to predict volatility of the currencies in the future.

Key words: EGARCH, modelling and forecasting, volatility, exchange-rates

1. Introduction and Objectives

Volatility is widely recognized as a measure of the dispersion of returns for a market

index or security; the importance of volatility on the current financial markets has been

addressed by a large number of studies (Alexander, 2001).

Although the standard deviation has its limitations as a measure of risk, this approach

is used most frequently to assess an investment`s risk (Emmer et al., 2013). The main

disadvantage of making use of the Standard Deviation to measure the risk is the absence

of suitable weightings that occur at a specific time ascribed to the errors. In other

words, the weightings of the errors that occur closer the present time ( ) have the

1 Transilvania University of Brasov, Ileanatache@unitbv.ro

2 Lucian Blaga University of Sibiu, cosmin.darie@ulbsibiu.ro