Analysis of Exchange Rate Volatility in Ghana: Lessons from Redenomination of the Cedi

Abstract

This study investigated the nature and asymmetric responses of volatility and also forecasted the exchange rate volatility taking into consideration the redenomination of the Ghanaian Cedi. To examine the nature and asymmetric responses of the volatility in the exchange rate returns GARCH(1,1)-ARMA(4,4) with Student’s t-distribution and EGARCH(1,1)- ARMA(4,4) with General Error Distribution were used on daily nominal effective exchange rate. It was found out that previous day’s news about conditional volatility increased the current day conditional volatility. But this effect had reduced considerably after the redenomination. In addition, the previous day’s conditional volatility of exchange rate returns increased current day conditional volatility but after the redenomination previous day’s conditional volatility decreased current day conditional volatility. Also, the volatility was asymmetric for the entire period and before the exercise, however, after the redenomination exercise volatility was symmetric. Also, conditional volatility in the foreign exchange market was very low and persistent in all cases but lowest after exercise. Finally, GARCH(1,1)- ARMA(4,4) estimate after redenomination of the Cedi was the best model that forecast the volatility in the exchange rate returns. Therefore, the redenomination of the Cedi had positive influence on the volatility in GHCUSD exchange rate return.