Analyzing Rupiah-USD Exchange Rate Dynamics: A Study with ARCH and GARCH Models

Abstract

The study aims to analyze the volatility of the Rupiah-USD exchange rate and predict future fluctuations using the Autoregressive Conditional Heteroskedasticity (ARCH) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models. The exchange rate data, spanning from January 2010 to December 2023, is sourced from Bank Indonesia (BI) and adheres to the Jakarta Interbank Spot Dollar Rate (JISDOR) regulations, focusing solely on business days. ARCH and GARCH models are widely applied in financial time series analysis because they capture and forecast time-varying volatility. This study analyzes historical exchange rate data to evaluate the persistence of volatility and detect any structural breaks that could impact future exchange rate behavior. The findings reveal that both models effectively capture the volatility of the Rupiah-USD exchange rate, but the GARCH (1,1) model demonstrates superior forecasting accuracy. This model's ability to account for long-term volatility clustering makes it particularly useful for predicting exchange rate dynamics. The research contributes to a deeper understanding of the factors driving exchange rate fluctuations, offering valuable insights for policymakers, investors, and businesses. These insights can help stakeholders manage exchange rate risks more effectively within Indonesia's open economy, where global financial conditions and external shocks significantly shape currency movements. The study emphasizes the importance of using advanced econometric models for accurate volatility predictions and informed decision-making.