Forex forecasting by using NGARCH model

Abstract

Foreign Exchange (Forex) is the market where a nation's currency trade with another. Flexible exchange rate started in 1973 since Bretton Woods Agreement was breakdown and it because the fluctuating exchange rate moves more drastically then before. Thus, forecasting exchange rates have become very important and challenge research issue for both academic and industrial. In this study used exchange rate selling prices of RM/USD. The daily data cover the period from 03/05/2007 to 29/05/2009 exchange rate from Bank Negara Malaysia and it was volatility and moves through the times. Thus, NGARCH model will be introduced in this study to forecast the selling prices for RM/USD exchange rate in future and GARCH(1,1) as a benchmark. All the data was analyzed by using Microsoft Office Excel 2007 software. The forecast performance value of RMSE of NGARCH (1, 1) is 0.022809308 smaller than RMSE of GARCH(1, 1) which value is 0.23439891. Therefore, the NGARCH model is more accuracy than GARCH model.