Abstract
Abstract: In most cases, financial variables are explained by leptokurtic distribution and often fail the assumption of normal distribution. This paper sought to explore the robustness of GARCH–type models in forecasting inflation volatility using quarterly time series data spanning 2002 to 2014. The data was sourced from the South African Reserve Bank database. SAS version 9.3 was used to generate the results. The initial analyses of data confirmed non-linearity, hereroscedasticity and non-stationarity in the series. Differencing was imposed in a log transformed series to induce stationarity. Further findings confirmed that ð´ð‘… (1)_ð¼ðºð´ð‘…ð¶ð» (1, 1)model suggested a high degree persistent in the conditional volatility of the series. However, theð´ð‘… (1)_ð¸ðºð´ð‘…ð¶ð» (2, 1)model was found to be more robust in forecasting volatility effects than the ð´ð‘… (1)_ð¼ðºð´ð‘…ð¶ð» (1, 1) and ð´ð‘… (1)_ðºð½ð‘… − ðºð´ð‘…ð¶ð» (2, 1)models. This model confirmed that inflation rates in South Africa exhibits the stylised characteristics such as volatility clustering, leptokurtosis and asymmetry effects. These findings may be very useful to the industry and scholars who wish to apply models that capture heteroscedastic and non-linear errors. The findings may also benefit policy makers and may be referred to when embarking on strategies in-line with inflation rate.
Highlights
The most commonly used statistical model is regression analysis
The sum of the autoregressive conditional heteroscedasticity (ARCH) and generalized autoregressive conditional heteroscedasticity (GARCH) coefficients is very close to unity, and this implies that volatility shocks are pretty persistent
This paper explored the robustness of GARCH-type models in estimating the volatility of inflation rates in South Africa
Summary
The most commonly used statistical model is regression analysis. The standard assumptions associated with this model are, violated when applied to time series data. The proposed methods are further effective when applied to data which exhibit heteroscedastic and non-linear errors. These assumptions may in many practical applications not be realistic. Webster (2000) describes inflation as the persistent increase in the level of consumer prices or persistent decline in the purchasing power of money. This is one economic factor that affects all other levels of the economy, and as a result it is the duty of every country to have effective control this sector. This would boost the rate of economic growth by encouraging savings to finance investments by both the government and households
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