POST-COVID-19 VOLATILITY OF EXCHANGE RATE RETURNS A CASE STUDY OF PAKISTAN

Authors

  • Anum Hayat
  • Marium Mazhar
  • Urooj Aijaz
  • Dr. Saghir Pervaiz Ghauri
  • Kishwer Sultana Lodhi
  • Urooj Aijaz

Keywords:

Exchange rate, covid-19, GARCH model, volatility, Pakistan

Abstract

The purpose of the study is to forecast the volatility for returns of the exchange rate of Pakistan concerning US dollars along with the impact of covid-19 so that we can find out the feasibility of holding this asset along with the risk and returns associated with it. For this purpose daily data has been taken from the State bank of Pakistan on a period from February 01, 2001, to June 30, 2021, where covid-19 is used as a dummy variable. Furthermore, in methodology, we applied GARCH models after finding the presence of the ARCH effect which is at ARCH (6) in the series. It is found in all GARCH models that the past volatility of the exchange rate returns has a statistically significant influence on the current volatility of the exchange rate means there is time-varying and time-correlated volatility associated with exchange rate returns. According to GARCH-M, GARCH-M (variance) (1,1) and GARCH-M (SD) (1,1) results it is concluded that average returns of exchange rate are small but significant and there is no risk factor associated with exchange rate returns but the past square residual terms have a significant impact on risk volatility. Furthermore, Both T-GARCH and E- GARCH depicts that the impact of covid-19, which is bad news, although has a significant impact but its magnitude has a lesser influence on exchange rate volatility than the good news.

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Published

2022-08-01