Modeling the EURUSD Return Volatility on the Days of Simultaneous Releases of Economic Indicators Unemployment Rate and Non-farm Payroll

Abstract

Among the currencies traded in the foreign exchange (Forex) market, Euro against the US Dollar (EUR/USD) remains as one of the dominant currency pairs. This study examines the disparities in the behavior of EUR/USD return volatility during 2011with the simultaneous release of two economic indicators of the US namely, unemployment rate (UR) and non-farm payroll (NFP) and the applicability of GARCH family models in modeling the return volatility. Literature on this kind of studies reveals that UR and NFP are highly influential on exchange rate movements. AR(2) and GARCH(1,2) models can be used to forecast the conditional mean and conditional variance of returns respectively. Conditional variance model can further be improved by including time around the release of indicators as a variance regressor.