Modelling the Volatility of Exchange Rates in Rwandese Markets

Abstract

This work applied Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approachto modelling volatility in Rwanda Exchange rate returns. The Autoregressive (AR) model with GARCH errors was fitted to the daily exchange rate returns using Quasi-Maximum Likelihood Estimation (Q-MLE) method to get the current volatility, asymptotic consistency and asymptotic normality of estimated parameters.Akaike Information criterion was used for appropriate GARCH model selection while Jarque Bera test used for normality testing revealed that both returns and residuals have fat tails behaviour. It was shown that the estimated model fits Rwanda exchange rate returns data well.