Modeling exchange rate volatility of the Papua New Guinea Kina against the US Dollar using GARCH-Type models

Abstract

Volatility in the exchange rate is a vital consideration in macroeconomic policy-making and financial decision-making, especially in emerging nations such as Papua New Guinea, where empirical research is still lacking. This paper focuses on investigating the exchange rate volatility of Papua New Guinea Kina (PGK/USD) within the 2024 to 2026 exchange rate reform period based on the GARCH models. The daily exchange rate data collected from Bank of Papua New Guinea was converted into logarithmic returns and used in the GARCH (1,1) and EGARCH (1,1) models for analysis. Tests for stationarity, non-normality, fat tails, and volatility clustering proved that the series was characterized by these factors. Results revealed skewness of 9.2839 and kurtosis of 125.0649, implying the series has high levels of leptokurticity. For the GARCH model, the coefficient of volatility persistence was found to be 0.6620 while that for the EGARCH was 0.8866, which has an asymmetry parameter of -0.0442 implying depreciation shocks have more effect on volatility than appreciation shocks.