Modeling Exchange Rate of Naira to Euro with the APLSTAR-GARCH model

Abstract

Application of the asymmetric power logistic smooth transition autoregressive (APLSTAR) model proposed by [1] to naira/Euro exchange rate spanning from January, 2006 to April, 2021, which is a nonlinear macroeconomic time series was considered. The APLSTAR model was justifiably fitted to the series and the fit of the APLSTAR model compared with the fits of the competing models revealed that the APLSTAR model fits the data exchange rate of naira to Euro better than the other asymmetric STAR models. Lagrange Multiplier tests for autoregressive conditional heteroscedastic (ARCH) effects were carried out and there was no substantial evidence to reject the presence of ARCH effects in the set of residuals used. Hence, we compared hybrid smooth transition autoregressive-generalized ARCH (STAR-GARCH) models using model evaluation criteria. On balance, the APLSTAR-GARCH (0, 1) model outperforms the other models under consideration.