Can economic policy uncertainty predict exchange rate volatility? New evidence from the GARCH-MIDAS model

This paper investigates the impact of relative economic policy uncertainty between China and the United States (the Sino-US EPU ratio) on the Chinese exchange rate volatility by employing a GARCH-MIDAS model. Moreover, we compare the out-of-sample volatility forecasting performance of the GARCH-MIDAS model with that of traditional GARCH-type models. The empirical results suggest that: (i) the Sino-US EPU ratio has a positive impact on the long-term volatility of the Chinese exchange rate, (ii) the GARCH-MIDAS model performs better than the traditional GARCH-type models.