Modeling RMB Exchange Rate Volatility – Application of GARCH Family Models

Abstract

The exchange rate risk caused by the two-way fluctuation of the RMB exchange rate will bring many effects. The volatility of the foreign exchange market is the most common feature of the financial market. Therefore, the research on the volatility of the RMB exchange rate is of great significance in economic and financial aspects. Through statistical analysis of the RMB exchange rate data, an ARMA model was established to eliminate the auto-correlation of the sequence, and the GARCH family model was combined to fit the data. Comparing different distribution hypotheses, the EGARCH model under the GED distribution determined by the information criterion can match well the financial time series peak and thick tail characteristics. That the RMB exchange rate has agglomeration volatility and leverage effect is also shown, and provides relevant suggestions for preventing RMB exchange rate risks.