Can economic policy uncertainty predict exchange rate volatility? New evidence from the GARCH-MIDAS model

•We investigate the impact of Sino-US EPU on the Chinese exchange rate volatility.•We compare the performance of the GARCH-MIDAS model with traditional models.•Sino-US EPU has a positive impact on the long-term Chinese exchange rate volatility.•The GARCH-MIDAS model performs better than the traditio...

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Bibliographic Details
Published in:Finance research letters 2020-05, Vol.34, p.101258, Article 101258
Main Authors: Zhou, Zhongbao, Fu, Zhangyan, Jiang, Yong, Zeng, Ximei, Lin, Ling
Format: Article
Language:English
Subjects:
Chinese exchange rate volatility
Economic policy uncertainty
Forecasting
GARCH-MIDAS model
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Summary:•We investigate the impact of Sino-US EPU on the Chinese exchange rate volatility.•We compare the performance of the GARCH-MIDAS model with traditional models.•Sino-US EPU has a positive impact on the long-term Chinese exchange rate volatility.•The GARCH-MIDAS model performs better than the traditional GARCH-type models. This paper investigates the impact of relative economic policy uncertainty between China and the United States (the Sino-US EPU ratio) on the Chinese exchange rate volatility by employing a GARCH-MIDAS model. Moreover, we compare the out-of-sample volatility forecasting performance of the GARCH-MIDAS model with that of traditional GARCH-type models. The empirical results suggest that: (i) the Sino-US EPU ratio has a positive impact on the long-term volatility of the Chinese exchange rate, (ii) the GARCH-MIDAS model performs better than the traditional GARCH-type models.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2019.08.006