On the use of arima and garch in modelling nigeria’s naira – us dollar monthly exchange rates

Abstract

This paper aimed at modelling the volatility of monthly average official exchange rate (Naira/USD) using the Autoregressive Integrated Moving Average (ARIMA) and Generalized Autoregressive Conditional Heteroscedasticity (GARCH) for the period January, 1981 to December, 2021. The data for the study was obtained from Central Bank of Nigeria 2021 Statistical Bulletin. The time plot, Augmented Dickey Fuller (ADF) and Phillip’s Perron (PP) were used to check for the Stationarity of the Series. It was discovered that the series is not stationary, thus the need for differencing to make it stationary. Based on the findings of the study, it was concluded that the ARIMA (0, 2,2) and GARCH (1,1) with Student’s t-distribution are the optimal models for modeling monthly average official exchange rates return (Naira/USD) in Nigeria.