Volume 4, Issue 3, September 2018, Page: 60-67
Modelling Volatility of the US Dollar Against the Kenyan Shilling Exchange Rate and Investigating the Effect of Kenyan Inflation Rates on this Volatility in Kenya
Carrine Andeyo Nandwa, Faculty of Science, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Anthony Waititu, Faculty of Science, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Anthony Wanjoya, Faculty of Science, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Received: Oct. 18, 2018;       Accepted: Nov. 20, 2018;       Published: Dec. 17, 2018
DOI: 10.11648/j.ijsd.20180403.12      View  40      Downloads  15
Abstract
Exchange rates and monetary policies are key tools in economic management and in the stabilization and adjustment process in developing countries, where low inflation rates and international competitiveness have become major policy targets. The study modelled the volatility of the US dollar against the Kenyan shilling (USD/KES) exchange rate and investigated the effect of inflation rates in Kenya on this volatility for the years 2005 to 2017. The data for this research was obtained from secondary sources: Central Bank of Kenya and the Kenya National Bureau of Statistics. The results indicated that the USD/KES exchange rate exhibited persistent signs of volatility. A number of heteroscedasticity models were then tested and the GARCH family (ARMA (1, 3)/EGARCH (1, 2)) model was concluded to be the best model to fit the volatility of the USD/KES exchange rate. The study tested the forecasting power of this model by comparing in-sample and out of sample observations and comprehensive conclusions were made that the model was the best fit to forecast the volatility of the USD/KES exchange rate. The volatility figures of the USD/KES exchange rate were extracted from the EGARCH model and further tests were conducted to investigate the effect of Kenyan inflation rates on them. Weighted Least Squares regression was conducted on the Kenyan inflation rates and volatility of the USD/KES exchange rate and comprehensive conclusions were made that there existed a significant relationship between the Kenyan inflation rates and the volatility of the USD/KES.
Keywords
Autoregressive Conditional Heteroscedasticity (ARCH), Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH), Weighted Least Squares (WLS)
To cite this article
Carrine Andeyo Nandwa, Anthony Waititu, Anthony Wanjoya, Modelling Volatility of the US Dollar Against the Kenyan Shilling Exchange Rate and Investigating the Effect of Kenyan Inflation Rates on this Volatility in Kenya, International Journal of Statistical Distributions and Applications. Vol. 4, No. 3, 2018, pp. 60-67. doi: 10.11648/j.ijsd.20180403.12
Copyright
Copyright © 2018 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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