What drives currency connectedness? Evidence from the BRICS currencies

Abstract

ABSTRACT With the rapid growth of the BRICS countries, their currencies have attracted wide attention. This study examines the dynamic connectedness of BRICS currencies and identifies the drivers of currency connectedness using a time-varying vector autoregressive (VAR) approach and a modified dynamic model averaging method. Our results indicate that dramatic changes in the currencies’ total and net connectedness are related to influential economic, financial, and political events. ZAR is a consistent net transmitter, INR and CNY are consistent net recipients, whereas BRL and RUB switched roles frequently. The risk and uncertainty indices, especially the VIX and SKEW, were the most pronounced drivers affecting the total and net connectedness among the selected drivers. The remaining factors (i.e. commodity prices, asset markets, and leading global currencies) generally had limited effects but played important roles in certain influential events.