Abstract:
The study applied the general autoregressive conditional heteroskedasticity (GARCH) model to forecast exchange rate volatility in SA for the period 1990Q1 to 2014Q2. GARCH (1, 1) and GARCH (1, 2) models were constructed using four variables; namely, exchange rate (ER), gross domestic product (GDP), inflation rate (INF) and interest rate (INTR). Prior to estimating the models, preliminary data analysis was conducted to check variable description. All the variables passed the diagnostics such as independence, unit root and normality. The models were constructed and subjected to model diagnostics testing. The CUSUM and RESET tests rendered the GARCH (1, 1) model stable and well specified respectively. This model was used for producing forecasts of exchange rate volatility in SA and the results showed that the South African exchange rate is volatile and this will be spilled over in the long run. The forecasts imply good news and make good economic sense for South Africa.
