Foreign Exchange Rate Volatility of Indian Rupee/ US Dollar
XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM)
13 Pages Posted: 2 May 2013
Date Written: December 21, 2012
This study is an attempt to understand the behavior of Indian foreign exchange rate and its volatility characteristics by using a daily observation of Indian Rupee against US Dollar over the period of 40 years from 1st April 1973 to 31st March 2012. The foreign exchange rate volatility of Indian rupee against US Dollar investigated by using different ARCH family models Such as ARCH(1,1) GARCH(1,1) EGARCH(1,1) TGARCH(1,1) etc... further to measure the impact of structural changes in exchange rate system of India, from pegged exchange rate to the Liberalized Exchange Rate Management System (LERMS) in 1992 and market determinant exchange rate regime in 1993, on exchange rate volatility this study divide the entire sample period in to two sub periods, namely pre implementation period(April 1973 to February 1993) and post implementation(march 1993 to march 2012) period. The study found by the symmetric GARCH (1,1) model that the volatility of Indian foreign exchange rate is highly persistent in all three period and in the case of post LERMS period which is high than that of Pre LERMS sample period. The asymmetric models such as EGARCH and TGARCH were evidenced that there is existence of asymmetric or leverage effect in Indian Foreign Exchange rate in all the three sample periods and that is more in post LERMS period. Over all this study modeled of Indian foreign exchange rate volatility.
Keywords: Foreign Exchange Rate, ARCH
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