Application of MS-GARCH Class Models in the Analysis of EUR/PLN Exchange Rate Risk in the Context of Poland’s Monetary Integration and the ERM II Mechanism
Application of MS-GARCH Class Models in the Analysis of EUR/PLN Exchange Rate Risk in the Context of Poland’s Monetary Integration and the ERM II Mechanism

Summary/Abstract: The aim of this article is to identify a hypothetical central EUR/PLN exchange rate within the ERM II framework and to assess the risk of exceeding the permissible fl uctuation band for the 2025–2028 horizon. The study uses daily exchange rate data from 2020–2024 and applies nonlinear models of the MS-GARCH (Markov-Switching GARCH) class in both homogeneous and heterogeneous variants, estimated using the quasi-maximum likelihood method. The research procedure included the selection of optimal P and Q parameters according to the AIC information criterion, the identifi cation of periods characterized by heightened volatility regimes, and the forecasting of exchange rate volatility using the MS-GARCH model combined with Monte Carlo simulations for logarithmic returns. The results indicate an optimal ERM II central rate of PLN 4.53, with the heterogeneous MS-GARCH model revealing 21 days of elevated risk of exceeding the upper threshold in November and December 2027. The study contributes an empirical, atheoretical approach to determining the ERM II central rate, fi lling a gap in the analysis of emerging economies outside the euro area.

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