Modeling Asymmetric Effect in African Currency Markets: Evidence from Kenya

摘要

Volatility modeling has of recent receivedconsiderable attention in the literature. The US-induced global financialcrisis offers more reasons to explore the volatility structures of currencymarkets. The present study seeks to examine empirically the possibility ofasymmetry in Kenyan exchange rate volatility in the light of the globalfinancial crisis of 2008-09 and the election violence of January-February 2008.GARCH and EGARCH models involving GED specification were employed. Thoughspecification tests favoured GARCH, EGARCH estimation suggested the possibilityof asymmetry in Kenyan shillings. In addition, the estimated effect of thecrises on returns and conditional volatility are about .04% and 2.19X10-4 %, respectively.Further, the estimated values of the ARCH and GARCH effects clearly indicatedthat the conditional volatility (on aggregate) reacted more intensely to shocksthan to the market movements. The subsample comparisons showed that while theconditional volatility reacted more intensely to market movements (than toshocks) during the pre-crises and electionperiods, it was moreinfluenced by shocks in the global crisis period. Finally, the articlerecommends some measures that would help to restore exchange rate stability inthe economy.