THE IMPACT OF THE TRADE-WAR BETWEEN THE USA AND CHINA ON THE VOLATILITY OF THE CHINESE YUAN AN ANALYSIS CONDUCTED USING THE GARCH (1, 1) MODEL

Abstract

This study investigates whether different specifications of univariate GARCH models can usefully forecast volatility in the foreign exchange market. The study uses only estimatesfrom a symmetric GARCH model, namely GARCH (1, 1) forCNY/USD exchange-rate. The dataset is obtained from “Investing.com” and covers the period between January 2016 to September 2019. The data focuses on the trade-war between USA and China due to a major political conflict. China economic growth was greatly reduced to levels not seen since 1992 while US economic forecasts have also decreased.This paper arrives at the conclusion that the GARCH (1, 1) model could be successfully used to better predict the volatility of the currencies than simply using unconditional volatility.