Volatility of the USD/CHF exchange rate at the beginning of the COVID-19 pandemic
Volatility of the USD/CHF exchange rate at the beginning of the COVID-19 pandemic

Summary/Abstract: PurposeWe address the problem of forecasting USD/CHF volatility at the beginning of the COVID-19 crisis. We chose popular currencies (Swiss franc and American dollar) in the period 1.07.2020 to 31.12.2020.Design/methodology/approachWe employed several volatility models, including APARCH, EGARCH, GJR-GARCH, TGARCH, and GARCH-MIDAS, on high-frequency USD/CHF data. Particular emphasis was placed on asymmetric models to capture volatility asymmetry.FindingsThe highest volatility occurred during the first wave of the COVID-19 pandemic. Volatility forecasts are most accurate with EGARCH and GARCH-MIDAS models that incorporate long-term asymmetry, particularly when predicting volatility over a longer planning horizon. GARCH-MIDAS models with short-term asymmetry perform best in the sample but are inferior in forecasting future volatility (out-of-sample).OriginalityThe originality refers to the subject of study (exchange rates instead of stocks), the methods used (GARCH-MIDAS, asymmetric volatility models), and the particular crisis period (the outbreak of the COVID-19 pandemic).Research limitations/implicationsEven in a market of relatively low volatility, such as forex, volatility reveals both long- and short-run components during the pandemic crisis and some asymmetry. Therefore, the use of more complicated methods is sometimes not justified by the improvement of prediction accuracy. The results are limited to specific data and a crisis period. Therefore, in the future, we need to determine whether these methods are effective in periods with average volatility.

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