Determinants Of Exchange Rate Volatility Research Articles

Causes of Exchange Rate Volatility

This study examined the determinants of exchange rate volatility basing evidence on 7 African countries; Niger, Sudan, Cameron, Equatorial Guinea, Tunisia, Congo, and Cote D’Ivoire from 1990-2023. The study conducted the Autoregressive Distributive Lag (ARDL) bounds testing for co-integration and also estimated the error correction model. Furthermore, ARCH and GARCH models were analyzed to measure the volatility of a time series by fitting an autoregressive model to the squared residuals of the time series. The ARCH and GARCH results suggest the volatility of the exchange rate markets in the aforementioned countries is not random. The speed of adjustment of the volatility in the exchange rate of the Sudanese economy is 39%, in Niger Republic it is 50%, in Cameroon it is 52%, in Tunisia it is 55%, in Congo the speed is 32%, in Equatorial Guinea, the speed of adjustment is 58% and in Côte D’Ivoire the speed is 45%, respectively. The study found that the determinants of exchange rate volatility among African countries vary depending on the specific country. The observed volatility in the Sudanese exchange rate was anchored by the significant positive influence of inflation and income differentials as well as the significant negative influence of interest rate differential. In Niger Republic, exchange rate volatility was driven by the significant positive influence of productivity growth and money supply as well as the significant variation in oil prices and interest rate differentials. The observed short-run volatility in Cameroon's exchange rate was significantly and positively influenced by inflation differential and money supply variation whereas it was significantly but negatively propelled by interest rate differential and oil price shock. In Tunisia, exchange rate volatility was stimulated by the significant positive influence of inflation differential, productivity growth, oil price shock, and the significant negative role played by trade balance. The observed short-run volatility in the Congolese exchange rate was induced by the significant positive impact of inflation differential, income differential, trade balance, variation in money supply, and the significant negative impact of interest rate differential. In Equatorial Guinea, the observed exchange rate volatility was determined based on the significant and positive impact of differential in the inflation rate, oil price shock, changes in the money stock, and the foreign balance of trade. The observed volatility in the Côte D’Ivoire exchange rate was significantly and positively driven by the differentials in inflation rate, interest rate, and income level, the foreign trade balance but significantly stimulated by the negative influence of oil price shock. The general policy advice is that governments of all the countries covered by the study should implement exchange rate controls to limit the volatility of their currency fluctuation by imposing a limit on the amount of foreign currency that can be traded in the country. African governments should monitor the inflation differential between their own country and their trading partners to see if it is becoming too large. If it is, the government might raise interest rates to make its currency more attractive to investors.

Determinants of Exchange Rate Volatility and Its Implication on the Nigerian Economy (1995-2020)

The study investigates the determinants of exchange rate volatility and its implication on the growth of the Nigerian economy; for the period (1995-2020). Secondary data were collected from the Central Bank of Nigeria Statistical Bulletin, 2020. The study employs Gross Domestic Product as proxy for the Nigerian economy and used as the dependent variable; whereas, exchange rate, import trade and export trade were used as explanatory variables to measure exchange rate fluctuation. Time series econometric techniques are used to test the hypotheses. Exchange rate has an insignificant impact on Gross Domestic Product in Nigeria. Import trade has a significant impact on Gross Domestic Product in Nigeria. Export trade has a significant impact on Gross Domestic Product in Nigeria. The error-correction result confirms that about 71% short-run adjustment speed from long-run disequilibrium. The coefficient of determination indicates that about 68% of the variations in the growth of the Nigerian economy can be explain by changes in exchange rate volatility variables. The study concludes that exchange rate fluctuation is positive; but, had a significant impact on the performance of the Nigerian economy. The study recommends that Government should encourage the export promotion strategies in order to maintain a surplus balance of trade and also conducive environment, adequate security, effective fiscal. The policy towards interest rate should be made such that savings would be stimulated thereby placing more funds in the hands of banks to intermediate to investors seeking funds. Government and policy makers should provide infrastructural facilities so that foreign investors will be attracted to invest in Nigeria. Government and policy makers should increase their surveillance on the commercial banks; in order to address the issue of arbitrarily increase of the exchange rate.

Determinants of exchange rate volatility: empirical evidence for Turkey

Purpose- In the literature the effect of exchange rate volatility on various macroeconomic variables has been extensively studied but there are not enough studies about the reasons of exchange rate volatility. The aim of the research is to present the theoretical framework about the determinants of exchange rate volatility and to determine the factors affecting exchange rate volatility in Turkey for a period from 1974 to 2016. Methodology- In this research the stationary analysis of the series is determined by the Augmented Dickey Fuller Test (ADF) and the PP (Phillips-Perron test) unit root tests. In addition the GARCH model is used to calculate the real effective exchange rate volatility. The Johansen cointegration test is used to determine whether there is a long-term relationship between variables. The coefficients of the long-run relationship between the variables are estimated by the FMOLS method. Findings- The ADF and PP unit root test results show that the series are stationary at first difference. According to Johansen cointegration test results, it has been found that there is a long-run relationship between the variables involved in the analysis. Results from the FMOLS method for determining the direction and severity of the long-term relationship between the variables reveal that LGFCF, LMONEY and LTRADE positively affects significantly, while LFDI, LGDPC, LGGEXP negatively affects real effective exchange rate volatility. Conclusion- The rise in domestic investment (LGFCF), money supply (LMONEY) and trade openness (LTRADE) increases the real effective exchange rate volatility, while the rise in foreign direct investment (LFDI), output (LGDPC) and government expenditures (LGGEXP) also reduces the real effective exchange rate volatility.

Soft power and exchange rate volatility

AbstractStandard models—based exclusively on macro‐financial variables—have made little progress in explaining the behaviour of exchange rates. In this paper, we introduce a neglected set of ‘soft power’ factors capturing a country's demographic, institutional, political, and social underpinnings to shed some light on the ‘missing’ determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996–2015, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility. After controlling for standard macroeconomic factors, we find that the ‘soft power’ variables—such as an index of voice and accountability, life expectancy, educational attainments, fragility of the banking sector, financial openness, and the share of agriculture relative to services—have a statistically significant influence on the level of exchange rate volatility across countries. In other words, countries with greater ‘soft power’ (i.e. better institutional quality) tend to experience a lower degree of exchange rate volatility.

Determinants of Exchange Rate Volatility: New Estimates from Nigeria

This study investigates the sources of exchange rate volatility in Nigeria from 1989Q1 to 2015Q4. The volatility of exchange rate was obtained through the use of Autoregressive Conditional Heteroscadasticity (ARCH) model. The study further employed Autoregressive Distributed Lag (ARDL) model and Granger Causality test to estimate the relationship between exchange rate volatility and its determinants in Nigeria. The findings revealed that net foreign asset and interest rate have positive and statistically significant impact on exchange rate volatility while fiscal balance, economic openness and oil price have positive and statistically insignificant impact on exchange rate volatility. Furthermore, nominal gross domestic product has negative and statistically insignificant impact on exchange rate volatility. Result of Granger Causality test reveals that there is bidirectional causality running from both fiscal balance and exchange rate volatility whereas unidirectional causality runs from economic openness and oil price to exchange rate volatility. There is however, no evidence of causality between net foreign asset, nominal gross domestic product and interest rate on one hand and exchange rate volatility. Consistent with the findings, the study recommends that government should increase the holding of foreign asset in order to ensure surplus or balance in the current account and there is need for the Central Bank of Nigeria to ensure a stable interest rate in the economy with a view to realize stable exchange rate.

The determinants of real exchange rate volatility in Nigeria

The naira exchange rate depreciation and volatility is among the vast macroeconomic maladjustments which have unfolded in the Nigerian economy in the recent past. This paper therefore, investigates the determinants of real exchange rate volatility in Nigeria from 1981 through 2008. Having obtained the volatility of exchange rate through the GARCH (1,1) techniques, the ECM was used to examine the various determinants of exchange rate volatility in Nigeria, while the co-integration analysis reveals the presence of a long term equilibrium relationship between REXRVOL and its various determinants. Our empirical analysis further shows that openness of the economy, government expenditures, interest rate movements as well as the lagged exchange rate are among the major significant variables that influence REXRVOL during this period. This study recommends that the central monetary authority should institute policies that will minimize the magnitude of exchange rate volatility while the federal government exercises control of viable macroeconomic variables which have direct influence on exchange rate fluctuation. Keywords: Exchange Rate, Volatility, GARCH, ECM, Co integration

Soft Power and Exchange Rate Volatility

Standard models—based exclusively on macro-financial variables—have made little progress in explaining the behavior of exchange rates. In this paper, we introduce a neglected set of “soft power” factors capturing a country’s demographic, institutional, political and social underpinnings to uncover the “missing” determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996–2011, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility, especially in emerging market economies. After controlling for standard macroeconomic factors, we find that the “soft power” variables—such as an index of voice and accountability, life expectancy, educational attainment, the z-score of banks, and the share of agriculture relative to services—have a statistically significant influence on the level of exchange rate volatility across countries.

English

Real exchange rate volatility is an important contributor to risks in the financial world. During periods of excessive fluctuations in exchange rates, foreign trade and investments could be affected negatively. The objective of this study is to determine the sources of exchange rate volatility in Ghana. The methodology employed is a dynamic econometric technique based on the Autoregressive Distributed Lag (ADL) Model to account for psychological inertia among others. The study used annual data covering the period 1980 to 2012 to investigate the determinants of real exchange rate volatility in Ghana. Consistent with the empirical literature, government expenditure is a major determinant of real exchange rate volatility. There existed a positive relationship between them. Further, both domestic and external debts were negatively related to real exchange rate volatility. Current external debt and a four year lag of domestic debt had significant impacts on real exchange rate volatility. The main contribution of this paper is empirical and methodological. Empirically, it adds new empirical evidence and new dimensions to the literature on determinants of exchange rate volatility in developing economies. Key words: Exchange rate volatility, Generalized Auto-Regressive Conditional Heteroscedasticity, autoregressive distributed lag.

The Determinants of Real Exchange Rate Volatility in Nigeria

The naira exchange rate depreciation and volatility is among the vast macroeconomic maladjustments which have unfolded in the Nigerian economy in the recent past. This paper investigates the determinants of real exchange rate volatility in Nigeria from 1981 through 2008. Having obtained the volatility of exchange rate through the GARCH (1,1) techniques, the ECM was used to examine the various determinants of exchange rate volatility in Nigeria, while the co-integration analysis reveals the presence of a long term equilibrium relationship between REXRVOL and its various determinants. Our empirical analysis further shows that openness of the economy, government expenditures, interest rate movements as well as the lagged exchange rate are among the major significant variables that influence REXRVOL during this period. This study recommends that the central monetary authority should institute policies that will minimize the magnitude of exchange rate volatility while the federal government exercises control of viable macroeconomic variables which have direct influence on exchange rate fluctuation. DOI: 10.5901/ajis.2013.2n1p459

Determinants of Exchange Rate Instability in a Developing Economy: Conceptual Issues and Further Evidence from Nigeria (1970-2005)

This study examines the determinants of exchange rate instability (volatility of Real Exchange Rate) in a developing economy. The cardinal focus is to ascertain the determinants of exchange rate volatility (instability) in a developing economy with particular reference to Nigeria as well as assess the implications of volatility of real exchange rate on selected macroeconomic variables. The study used ordinary least square (OLS) technique in relation to time series data on exchange rate instability (VRER), current account balance (CABY), import (IMPY), External Reserves (EXTRESS), inflation and economic growth (GDP). Instability of exchange rate is measured by three years moving average of standard deviation of real exchange rate. This paper advocates that besides the basic macroeconomic variables which are acknowledged as determinants of exchange rate instability a realistic exchange rate capable of accelerating economic growth, reducing import and also stemming the tide of inflation are paramount in a developing economy and should be maintained. Equally, carefully handling unbridled exchange rate in an import dependent economy which is capable of inducing price escalation is a sine qua non in the economy.

Public information releases, private information arrival and volatility in the foreign exchange market

This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.