Modelling Exchange Rate Volatility of Kenya’s Top Five Trade Partners Research Report in Mathematics,number 15, 2018

Abstract

Theworld has become a global village and trade among countries has also become inevitable. Since most countries use their own domestic currencies, how much of one currency should be exchanged for another has slowly become a big issue. As a result of this exchange rate and exchange rate volatility has become a topic of interest among traders, Investors and other stakeholders. This research papers seeks to nd the best GARCH family of models that ts into the top ve Kenya’s trading partners currencies, which are USD, EUR, GBP, JPY and UGX and also checks whether there is co-integration in the trade volume data in USD which accounts for over 60 percent of Kenya’s imports and exports. The data used for both the exchange and trade volume span from January 2005 to December 2017. The results show that GARCH(1;2) ts KES/USD data and KES/GBP while GARCH(2;2) tted KES/EUR , KES /JPY and UGX/KES. The test for co-integration in the trade volume data showed that there is a co-integrating relationship in the trade volume data and hence conventional statistical analysis is unsuitable for this kind of data.