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I want to examine exchange rate volatility on Stock Returns. Please, if I Generate Exchange rate volatility (ER_vol)using standard deviations approach, can I include the (ER_vol) as a regressor in the Mean or Variance equation of the GARCH/EGARCH model?

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Yes, because GARCH is taking in account for characteristics of exchange rate volatility such as dynamics of conditional heteroscedasticity.

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  • $\begingroup$ Thank you for the information. Since some authors used Standard deviation as a measure of volatility, using same as a regressor in a volatility model (e.g. GARCH 1,1) would mean measuring volatility twice or double. $\endgroup$ – James Mark Gbeda Jan 8 at 0:53
  • $\begingroup$ I mean won't that mean measuring Volatility twice or double? $\endgroup$ – James Mark Gbeda Jan 8 at 1:32
  • $\begingroup$ No, GARCH (1,1) states that the conditional variance depends not only on the squared error in the previous time period but also on its conditional variance in the previous period, the model can be extended to a GARCH (p,q) model where the current conditional variance is parameterized to depend upon p lagged terms of the squared error and q terms of the lagged conditional variance. $\endgroup$ – Gogo78 Jan 8 at 8:48
  • $\begingroup$ Very well Noted. Thank you very much. Sorry for late reply. $\endgroup$ – James Mark Gbeda Jan 20 at 15:57
  • $\begingroup$ You are welcome, you can put answered sign in post so others can use it. $\endgroup$ – Gogo78 Jan 20 at 19:05

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