The Study Of ARCH Models And The Application Of GARCH Model In Exchange Rate

Exchange rate is closely related to the national economy and the people’s liveli-hood. The investigation of exchange rate fluctuations is always the important part in the study of financial time series. It is also the goal that National regulatory authority focuses on. In order to analyze the volatility of the exchange rate, we make a review on the ARCH models, compare the advantages and disadvantages of four models, explain the modeling methods and introduce the relevant testing methods, i.e. LM test and ADF test. Then We put forward the possibility of using low-order GARCH model to predict the volatility.For the empirical research, we do statistical analysis on the return of yuan-dollar exchange rate from 2001 untill now. We find that the residuals have significant long memory property via heteroscedastical testing. Then we use the ARCH family models to fit the data and compare their precision. The computation results display the asym-metry of the volatility of the return rates. This implies that GARCH and TARCH model can fit the data better. The two models also have a good prediction result ac-cordingly. Based on the statistical analysis, the relevant departments can take internal and external monitoring measures to discover problems before risk occurs.