To study Volatility between

INR and USD Using

Heteroskedastic Models
Submitted By:
Soumya Sreekumar 12DM-145
Arifa Kazi 12FN-024
Prakhar Saxena 12DCP-080
Nikash Kumar 12DCP-071
Tanuj Arora 12DCP-117
Deepanshu Siddhanti 12DCP-029
Agenda
Data Historical Exchange Rates for
3 years (September 2010 -2013)

Tests for Stationarity
If non stationary data exists, conversion to
stationary

Applying different Models
ARCH, GARCH, TARCH, E-GARCH and
PARCH

Initial Approach
Exchange Rates Time
Series Data
It can have Variable
Variance and
Far off Mean indicating
Non Stationarity
Thus, Cannot be
Modeled or Forecasted
as it is
Unit Root Testing in
Eviews determines Non
Stationarity
Conversion to
Stationarity by Taking
Log Normal Returns

Unit Root Tests
Phillips Peron Test




Augmented Dickey-Fuller Test

P-value > 0.05
means Null
Hypothesis cannot
be rejected.

Conclusion:
Exchange Rate
data is non -
stationary
Conversion to Stationary Data
Eviews Quick Tab Generate
Series
Equation entered is:
usd_s = dlog(inr_usd) to give
Continuously Compounded Returns.
Applying Dickey Fuller Test

P-value < 0.05
means Null
Hypothesis can
be rejected

Conclusion:
Exchange Rate
Log Return Data
is stationary
ARMA Estimation Output
Eviews Quick Tab Estimate
Equation
Equation: Dlog(inr_usd) c ar(1) ma(1)

P-value < 0.05 means
Null Hypothesis can be
rejected

Conclusion:
Model is significant
AR Yesterdays Price
does not have a
negative impact on
current price
MA Yesterdays
Volatility has a positive
impact on current price
ARMA Graph

Garch
Aim Forecast
variance based on
past information

All coefficients are
positive and
significant

Shocks to volatility
have a persistent
effect on the
conditional variance


Tarch
Aim To check
asymmetric news
impact on the
volatility of
exchange rate

Gamma is negative
and significant

Bad news may not
increase volatility
Gamma 0 implies
asymmetric effect
of news is present


Dependent Variable: DLOG(INR_USD)
Method: ML - ARCH (Marquardt) - Normal distribution
Date: 09/11/13 Time: 20:48
Sample (adjusted): 9/14/2010 9/10/2013
Included observations: 763 after adjustments
Convergence achieved after 15 iterations
MA Backcast: 9/13/2010
Presample variance: backcast (parameter = 0.7)
GARCH = C(4) + C(5)*RESID(-1)^2 + C(6)*RESID(-1)^2*(RESID(-1)<0) +
C(7)*GARCH(-1)
Variable Coefficient Std. Error z-Statistic Prob.
C 0.000264 0.000192 1.375826 0.1689
AR(1) -0.555827 0.168779 -3.293217 0.0010
MA(1) 0.671094 0.152369 4.404401 0.0000
Variance Equation
C 7.90E-07 2.48E-07 3.189087 0.0014
RESID(-1)^2 0.145466 0.030221 4.813429 0.0000
RESID(-1)^2*(RESID(-1)<0) -0.098825 0.026631 -3.710951 0.0002
GARCH(-1) 0.883509 0.022334 39.55864 0.0000
R-squared 0.014542 Mean dependent var 0.000423
Adjusted R-squared 0.006720 S.D. dependent var 0.005930
S.E. of regression 0.005910 Akaike info criterion -7.670058
Sum squared resid 0.026407 Schwarz criterion -7.627514
Log likelihood 2933.127 Hannan-Quinn criter. -7.653678
F-statistic 1.859278 Durbin-Watson stat 2.008150
Prob(F-statistic) 0.085233
Inverted AR Roots -.56
Inverted MA Roots -.67
E-Garch
Variable Coefficient Std. Error z-Statistic Prob.
C 0.000177 0.000175 1.010816 0.3121
AR(1) -0.596517 0.143221 -4.165017 0.0000
MA(1) 0.711246 0.124667 5.705174 0.0000
Variance Equation
C(4) -0.617559 0.154017 -4.009679 0.0001
C(5) 0.232701 0.041022 5.672543 0.0000
C(6) 0.076575 0.019992 3.830366 0.0001
C(7) 0.958289 0.012939 74.05972 0.0000
R-squared 0.012717 Mean dependent var 0.000423
Adjusted R-squared 0.004881 S.D. dependent var 0.005930
S.E. of regression 0.005916 Akaike info criterion -7.672488
Sum squared resid 0.026456 Schwarz criterion -7.629944
Log likelihood 2934.054 Hannan-Quinn criter. -7.656108
F-statistic 1.622938 Durbin-Watson stat 2.006895
Prob(F-statistic) 0.137822
Inverted AR Roots -.60
Inverted MA Roots -.71
Aim To study the
leverage effect of
news on exchange
rate

All coefficients are
positive

Bad news may not
have a stronger
impact than good
news.

Last periods
forecast has great
impact

P-Garch
Variable Coefficient Std. Error z-Statistic Prob.
C 0.000249 0.000189 1.316457 0.1880
AR(1) -0.589688 0.142506 -4.137998 0.0000
MA(1) 0.707184 0.123404 5.730659 0.0000
Variance Equation
C(4) 0.000156 0.000248 0.626489 0.5310
C(5) 0.122865 0.024157 5.086068 0.0000
C(6) -0.371455 0.087933 -4.224301 0.0000
C(7) 0.863090 0.025924 33.29256 0.0000
C(8) 1.073143 0.287283 3.735495 0.0002
R-squared 0.013432 Mean dependent var 0.000423
Adjusted R-squared 0.004285 S.D. dependent var 0.005930
S.E. of regression 0.005917 Akaike info criterion -7.671123
Sum squared resid 0.026437 Schwarz criterion -7.622502
Log likelihood 2934.534 Hannan-Quinn criter. -7.652403
F-statistic 1.468497 Durbin-Watson stat 2.013825
Prob(F-statistic) 0.175170
Inverted AR Roots -.59
Inverted MA Roots -.71
Aim To study the
asymmetric impact
of news on the
volatility of
exchange rate

Gamma is negative
and significant

Bad news has a
stronger impact on
volatility of
exchange rate than
good news.


Component Garch
All the coefficients
are positive.

and are not
significant.

This means if there
is any bad news
and the rupee
depreciates the
change would not
be significantly
higher than when a
good news comes.


MA Backcast: 9/13/2010
Presample variance: backcast (parameter = 0.7)
Q = C(4) + C(5)*(Q(-1) - C(4)) + C(6)*(RESID(-1)^2 - GARCH(-1))
GARCH = Q + C(7) * (RESID(-1)^2 - Q(-1)) + C(8)*(GARCH(-1) - Q(-1))
Variable Coefficient Std. Error z-Statistic Prob.
C 0.000148 0.000186 0.797620 0.4251
AR(1) -0.557471 0.176975 -3.150003 0.0016
MA(1) 0.665888 0.162626 4.094604 0.0000
Variance Equation
C(4) 0.000171 0.000226 0.757949 0.4485
C(5) 0.999509 0.000652 1532.768 0.0000
C(6) 0.008344 0.019350 0.431191 0.6663
C(7) 0.102803 0.026665 3.855385 0.0001
C(8) 0.872383 0.031717 27.50560 0.0000
R-squared 0.013533 Mean dependent var 0.000423
Adjusted R-squared 0.004387 S.D. dependent var 0.005930
S.E. of regression 0.005917 Akaike info criterion -7.658026
Sum squared resid 0.026434 Schwarz criterion -7.609405
Log likelihood 2929.537 Hannan-Quinn criter. -7.639307
F-statistic 1.479687 Durbin-Watson stat 1.991976
Prob(F-statistic) 0.171080
Inverted AR Roots -.56
Inverted MA Roots -.67
Conclusions
Recent news affects volatility to a
greater extent

Exchange rate volatility shows high
persistence

Asymmetric Effects of news on
volatility are present
Thank you