Exchange Rate Volatility Analysis of the Rwandan Franc (1990-2010)

Abstract

This study analyses the volatility of foreign exchange rate and its causes in the Rwandan Economy and then derives appropriate statistical models for forecasting the foreign exchange rate of that economy. Univariate volatility and conventional time series models are applied to the exchange rate data and their forecasting powers compared using a set of accuracy measures like AIC, Log Likelihood and BIC. The study also sought to investigate whether News affect exchange rates of Rwanda. The News includes the genocide of 1994 and the country’s joining of EAC in July 2007. Significant volatility models are obtained for Rwandan exchange rate data implying that the concept of volatility has relevance in this particular economy. The models both symmetric and asymmetric used in this research are GARCH and its family of models like EGARCH. The EVIEWS statistical package is used in the analysis. The models obtained indicated that the Rwanda exchange rate is highly volatile and is affected by news. The 1994 genocide was found to increase the exchange rate volatility while the integration of the economy into the East African Community was found to reduce the exchange rate volatility. The country is therefore encouraged to open up its economy to the outside markets especially those in the region. This will not only reduce the exchange rate volatility but also encourage both local and foreign investors.