Survey_MP_2003

Abstract

To examine the appropriateness of the stable GARCH hypothesis, we model returns1 on five daily spot foreign exchange rates against the U.S. dollar, namely the British pound, Canadian dollar, German mark, Japanese yen, and the Swiss franc. The choice of exchange rate allows us to compare our more general GARCH specification to that used by Liu and Brorsen (1995), who set ? = ? in (2). However, our sample is somewhat larger than theirs, covering the period January 2, 1980 to July 28, 1994, yielding series of lengths 3681, 3682, 3661, 3621, and 3678, respectively. Serial correlation was found to be negligible, and, as is common in practice, a GARCH(r, s) specification with r = s = 1 was sufficient to capture serial correlation in the absolute returns.