Assessing the nexus between currency exchange rate returns, currency risk hedging and international investments: Intelligent network-based analysis

Abstract

Through the exogenous growth model, the inflow of international investments promotes economic growth by the inclusion of foreign technologies in production functions and capital accumulation. But the proportional increasing outflow of international investments from emerging countries rapidly squeezes their economies. The main reasons of the massive gap between the inflow and outflow of international investments are devaluation of their home currency and inaccessibility of the foreign exchange derivatives instruments for potential currency risk hedging. The previous studies have strongly ignored the role of two-way multicurrency cross-risk hedging (MCCRH) in bilateral flows of international investments by conditioning effect of the currency returns. By considering the significance of the subject matter, it is needed to assess the interaction between two-way MCCRH, currency returns of multicurrency exchange rate returns (MCERRs) and bilateral flows of international investments, and conditional dependency of random variables of the intelligent network structure. The regression-based MLP and probabilistic Bayes intelligent neural networks represented that the two-way MCCRH and currency returns of MCERRs have a strong impact on bilateral flows of international investments in an emerging country. The constraint-based approach of the probabilistic Bayes intelligent neural network showed that the two-way MCCRH conditionally affects the bilateral flows of international investments given the percentage of currency returns of MCERRs. This study may assist policymakers and regulators to enhance currency returns and availability of foreign exchange derivatives instruments at the least cost to grab more intention of international investors for investments that will expand the economic growth of Pakistan.