Bangladesh Bank Training Academy Journal

Abstract

Foreign exchange rate volatility is an important factor involved in the decision making of investors and policymakers. This study attempts to measures the volatility behavior in terms of exchange rate returns and volume of daily transactions in foreign exchange market of Bangladesh ranging from July 2014 to June 2018, applying GARCH family models (i.e. PARCH, EGARCH, and IGARCH). The results show that the presence of volatility clustering in foreign exchange rate returns as the volatility of risk is responsive to past shocks and the past volatility influences the current volatility of exchange rate returns. Moreover, the return is positively related to its volatility. The existence of leverage effect is also evidenced in the Bangladesh foreign exchange market because positive past shocks increase volatility more than the negative past shocks of the same magnitude. Thus, the appreciation and the depreciation of Bangladesh Taka against USD do not necessarily cause symmetric variation in he exchange rate returns.