Model and Forecast the Volatility of the Variables - Economics Assignment Help

Assignment Task:

Task:

OBJECTIVE OF THE STUDY: -
Our objective is to model and forecast the volatility of the variables under study for our time periods and to study the co-movements/correlation of the volatilities with, Gold reserve – FX rate and currency assets reserve–FX rate. This study uses weekly data of time series to prove the empirical relationship between Gold reserve – FX rate and currency assets reserve – FX rate. This data used in this study comprises weekly observations of all variables from 02/01/2015 to 28/08/2020.
 

METHODOLOGY : - To achieve our objectives, we use the ARIMA and (DCC) GARCH framework and analysis is done using the R software.

• Univariate Analysis We look to model and forecast the volatility of each of these variables along with forecasting for the actual values. We first check for the presence of ARCH effects, and if the data does exhibit the same, we go ahead with the ARMA-GARCH method to fit the right GARCH model. To ascertain the ARMA model to be used in GARCH modelling, we use ARIMA modelling to find the best model that satisfies all criteria including the stationarity, lowest RMSE, MSE and information criteria. Upon finding the suitable ARMA model, we fit the same into a GARCH(1,1) model since GARCH is parsimonious. We, thus, model and predict the volatility. We then go on to conduct in sample forecasting of the actual values of each variable. The reason we had chosen GARCH modelling over ARCH is that GARCH is more widely preferred due its suitability to financial analysis.

• Multivariate Analysis We are using the DCC-GARCH Model to model forecast the co movement within all the pairs that we have considered. We use the DCC-GARCH model over regular 6 GARCH as it models co-movement better and provides dynamic correlation and covariance measures in the presence of non-constant probability. We first test for cointegration to determine whether we need to use VECM or VAR, and then move on to the construction of the best model according to that method.

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