Modelling and Forecasting Exchange-rate Volatility with ARCHtype Models

This paper uses the Generalized Autoregressive Conditional Heteroskedasticity models to estimate volatility (conditional variance) in the monthly returns of the principal stock exchange of Sudan.over the period from January 1999 to December 2013.The models include both symmetric and asymmetric models that capture the most common stylized facts about index returns such as volatility clustering and leverage effect.The empirical results show that the conditional variance process is highly persistent (explosive process), and provide evidence on the existence of risk premium for the return series which support the positive correlation hypothesis between volatility and the expected stock returns.Our findings also show that the asymmetric models provide better fit than the symmetric models, which confirms the presence of leverage effect.These results, in general, explain that high volatility of return series is present in the Sudanese stock market over the period. Exchange Rate Policy in Sudan: An OverviewThe exchange rate market in Sudan has undergone numerous policy interventions.Throughout the period 1956-1979, the exchange rate has been pegged at a fixed rate of approximately one Sudanese pound to US$2.85.In 1979, the government shifted to a floating exchange rate system with the aim of boosting the economy since the country had witnessed many economic problems including, fiscal deficit, external disequilibrium, high inflation rates and mounting external debts during the 1970s (Ali 1985).Thus, the government launched the first version of the stabilization and liberalization programs, which focused on exchange rate devaluation as a key policy tool for economic recovery.As a result, the Sudanese pound underwent a significant devaluation to the rate of one US dollar to 0.35 Sudanese pounds.The main goal of this policy was to reduce the external imbalances through encouraging the volume of exports, and attracting private international capital, such as remittances of Sudanese nationals working abroad (SNWA).The monetary authority in that period had adopted a dual exchange markets, namely, the official and the parallel markets.Although the parallel exchange market in the beginning was limited to foreign trade, the massive flows of migrants" remittances in the second half of that decade extended the parallel exchange activities and Modelling and Forecasting Exchange-rate Volatility with ARCH-type Models