International Journal of Innovative Research and Development

Salie Ayalew , M. Chitti Babu , L. K. Mohana Rao

Abstract

This paper investigated the volatility of Birr/Dollar exchange rates in Ethiopia using GARCH (1, 1), GJR-GARCH (1, 1), EGARCH (1, 1), Component ARCH (1, 1) and Asymmetric Component ARCH (1, 1) models. Using monthly data over the period January 1957 to December 2008. The impact of the deregulation of foreign exchange market on volatility was investigated separately for the period before deregulation, fixed exchange rate period until 1992 and managed float regime (September 1992-January 2010). The results from all the models show that volatility is less persistent and low unconditional volatility. The result is not the same for the fixed exchange rate period and managed float rate regime. The results of GJR-GARCH and EGARCH models have leverage effect, which is in confirmatory with the result of Nelson (1990). Based on AIC and SIC, the EGARCH and GJR-GARCH models are found to be the best models.

Keywords

Volatility, Persistence, Leverage and Asymmetric Properties of Exchange Rate

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