Modelling Exchange Rate and Interest Rate Volatility Persistence in Emerging African Economies

Abstract

This study investigates volatility persistence of exchange and interest rates in Africa taking into account the rate of volatility decay. Generalized autoregressive conditional heteroscedasticity (GARCH) model is used to estimate volatility persistence for these economies. The results presented in this study suggest that there is volatility persistence in emerging African exchange rate and interest rate markets. Further empirical estimates reveal that rate of volatility decay varies considerably among the economies, for instance, exchange rate volatility in Nigeria diminishes to half of its original size within two months, while it takes approximately 12 months for volatility in Ghana to diminish to half of its original size. The study concludes that exchange and interest rates volatility risk exist in emerging African economies. The results of this study therefore have important implications for international trading, international portfolio diversification, and asset pricing and financial risk management.