A Double-threshold GARCH Model for the French Franc/Deutschmark exchange rate

Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 (2001) A Double-threshold GARCH Model for the French Franc/Deutschmark exchange rate. Journal of Forecasting, 20 (2). pp. 135-143. ISSN 0277-6693 doi: 10.1002/1099-131X(200103)20:2<135::AID-FOR780>3.0.CO;2-R

Abstract/Summary

This paper combines and generalizes a number of recent time series models of daily exchange rate series by using a SETAR model which also allows the variance equation of a GARCH specification for the error terms to be drawn from more than one regime. An application of the model to the French Franc/Deutschmark exchange rate demonstrates that out-of-sample forecasts for the exchange rate volatility are also improved when the restriction that the data it is drawn from a single regime is removed. This result highlights the importance of considering both types of regime shift (i.e. thresholds in variance as well as in mean) when analysing financial time series.