DETERMINATION OF VOLATILITY CLUSTERING IN GARCH FAMILY MODELS USING R

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DETERMINATION OF VOLATILITY CLUSTERING IN GARCH FAMILY MODELS USING R (STATISTICS PROJECT TOPICS AND MATERIALS)

 

ABSTRACT

This work investigated the volatility clustering of exchange rate of Nigeria Naira against the United States of America Dollar. The data used in the present study consist of the monthly exchange rates of the Naira to Dollar from January 1999 to December 2012 obtained from the Central Bank of Nigeria. The main focus is to provide a proper understanding of the theory and empirical working of GARCH family models and to determine volatility clustering. The EGARCH(2,2) model was selected as the best model from point of view of the Mean Absolute Error. The estimated parameters, plots of returns series and plot of conditional variances were used in determining the volatility clustering. There were clear evidences of volatility clustering in Exchange rate of Nigeria naira against United States dollar.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

For almost five decades, exchange rates movements and fluctuations have become an important topic of macroeconomic analysis and policy makers, particularly after the collapse of the Bretton Woods agreement in 1973 (Omojimite and Akpokodje 2010), of fixed exchange rates among major industrial countries. This volatility in exchange rate affects security valuation, investment analysis, profitability and risk management. This is because it exposes exchange rates to financial uncertainties. The volatility in the exchange rate may cause a significant impact on macroeconomic analysis such as prices, wages, unemployment and the level of output.

Exchange rate means the exchange of one currency for another price for which the currency of a country (Nigeria) can be exchanged for another country’s currency as in US (dollar). A correct exchange rate do have important factors for the economic growth for most developed countries whereas a high volatility has been a major problem to the economy of some of the African countries such as Nigeria. Some factors which definitely affect exchange rate are interest rate, inflation rate, trade balance, general state of economy, money supply and other similar macro-economic giants’ variables.

A steady exchange rate can help financial institutions to tackle and to monitor the performance of investments, financing, hedging and as well as reducing their operational risks.

Volatility can be represented by variance or standard deviation which is unconditional and does not recognize that there are interesting patterns in asset volatility e.g. time-varying and…..

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DETERMINATION OF VOLATILITY CLUSTERING IN GARCH FAMILY MODELS USING R (STATISTICS PROJECT TOPICS AND MATERIALS)

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