Increased Exchange Rate Volatility Research Articles

The exchange rates volatilities impact on the stock and real estate markets in South Africa

Purpose Understanding which market to invest in for a well-diversified portfolio is fundamental in economies that are highly vulnerable to fluctuations in exchange rates. Extant literature that has considered phenomenon hardly juxtapose the markets. The purpose of this study is to examine the effects of exchange rate volatility on the Stock and Real Estate market of South Africa. The essence is to determine whether the fluctuations in the exchange rate influence the markets prices differently. Design/methodology/approach The Generalised Autoregressive Conditional Heteroskedasticity [GARCH (1.1)] model was used in establishing the effect of exchange rate volatility on both markets. This study used monthly South African data between 2000 and 2020. Findings The results of this study showed that increased exchange rate volatility increases stock market volatility but decreases real-estate market volatility, both of which revealed weak influences from the exchange rates volatility. Practical implications This study has implication for policy in using the exchange rate as a policy tool to attract foreign portfolio investment. The weak volatility transmission from the exchange rate market to the stock and real estate market indicates that there is prospect for foreign investors to diversify their investments in these two markets. Originality/value This study investigated which of the assets market, stock or housing market do better in volatile exchange rate conditions in South Africa.

The Asymmetric Effects of Exchange Rate Volatility on Domestic Investment in Asia

ABSTRACT: Exchange rate volatility is said to affect domestic investment in either direction. An increase in exchange rate volatility can affect domestic investment negatively since risks are higher, mostly due to volatile prices that are the results of exchange rate volatility. Most previous studies assumed that the response is symmetric. However, one study recently demonstrated that the effects of exchange rate volatility on domestic investment could be asymmetric. We add to this new asymmetry literature by assessing the short-run and long-run effects of exchange rate volatility on domestic investment in eight Asian countries. The linear Autoregressive Distributed Lag (ARDL) approach of Pesaran et al. (2001) is used to estimate the symmetric effects of exchange rate volatility on investment. We then follow Shin et al.’s (2014) approach of asymmetric cointegration and error-correction modelling to estimate asymmetric effects of exchange rate volatility on investment. The advantage of using both the approaches is that the variables could be a combination of I(0) and I(1), ruling out pre-unit root testing since these are the properties of almost all macroeconomic variables. Another advantage is that both approaches yield short-run and long-run results in one step. These advanced methods are applied to data from Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, and Thailand. We find that when a traditional linear and symmetric ARDL investment model was estimated for each of the eight countries in our sample, exchange rate volatility had a significant short-run effects on domestic investment in six countries. The short-run effects lasted into significant long-run effects only in the cases for Malaysia and Thailand. However, when a nonlinear model was estimated, the short-run asymmetric effects of volatility were found in all the eight countries. The short-run effects lasted into the long run only for Hong Kong, Indonesia, and Thailand. Clearly, more significant effects of exchange rate volatility were established by estimating a nonlinear model which must be attributed to the nonlinear adjustment of exchange rate volatility. These findings provide policy guidelines to investors in these countries as to how and in which direction exchange rate uncertainty will affect their investment decisions. They can then hedge against uncertain exchange rate volatility and maintain a stable investment environment.

Unpacking the asymmetric impact of exchange rate volatility on trade flows: A study of selected developed and developing Asian economies.

Maintaining a stable exchange rate is a challenging task for the world, especially for developing economies. This study examines the impact of asymmetric exchange rates on trade flows in selected Asian countries and finds that the effects of increased exchange rate volatility on exports and imports differ among Pakistan, Malaysia, Japan, and Korea. The quarterly data from the period 1980 to 2018 is collected from the International Financial Statistics (IFS) database maintained by the International Monetary Fund (IMF). We employ both linear and non-linear Autoregressive Distributed Lag (ARDL) models for estimation. The non-linear models yielded more significant findings, while the linear models did not indicate any significant effects of exchange rate volatility on trade flows. The results of the study suggest that in the case of Pakistan, both the linear and non-linear models indicate that increased exchange rate volatility adversely affects exports and imports, while decreased volatility enhances both. This implies that stabilizing the exchange rate would be beneficial for Pakistan's trade. In contrast, the linear model applied to Malaysia shows no long-run effects of exchange rate volatility on exports. However, the result suggests that decreased volatility stimulates Malaysia's exports. Therefore, in the case of Malaysia, stabilizing the exchange rate could contribute to boosting exports. We also found that increased exchange rate volatility boosts exports of Japan. On the other hand, decreased volatility hurts exports of Japan. As for the long-run effects of exchange rate volatility on imports, we found that increased volatility boosts imports of Korea. The study provides various policy implications regarding the impact of exchange rate volatility on trade flows in developing economies. The study highlights the importance of country-specific considerations in understanding the impact of exchange rate volatility on trade flows, and has important policy implications for promoting trade and economic growth in these nations. It emphasizes the need to model exchange rate volatility separately for developed and developing countries and to continue research and analysis to identify ways to mitigate its negative effects on the economy.

Influences of risk‐aversion behavior and purchasing option in a cross‐border dual‐channel supply chain

AbstractConsidering the rapid development of cross‐border e‐commerce, this paper constructs a cross‐border dual‐channel supply chain with a supplier and a retailer in different countries. The supplier directly sells products to overseas market through an online channel and a retail channel. Since the supplier expands the overseas market and bears the potential risk of exchange rate volatility, the supplier is risk‐averse. In the presence of exchange rate volatility, the risk‐averse supplier decides whether to purchase an option to hedge against the risk of exchange rate volatility. Conditional value at risk is applied as a measure of the supplier's risk‐averse behavior. To identify the conditions under which the risk‐averse supplier should purchase an option, we analyze two scenarios: the benchmark model and the option model. By comparing the benchmark model with the option model, we show that if the option premium is lower than a threshold, the risk‐averse supplier prefers to purchase an option, which also makes the retailer better off. Interestingly, when the supplier becomes less risk‐averse, as the exchange rate volatility increases, both players benefit a higher utility in the option model. Finally, we verify the results’ robustness using numerical analysis.

Does uncertainty promote exchange rate volatility? Global evidence

PurposeExchange rate volatility is an important factor affecting investors and policymakers. This study aims to examine the impact of uncertainties, in terms of changes in economic policy, monetary policy and global financial markets, on exchange rate volatility.Design/methodology/approachThe study uses the GARCH (1,1) univariate model to calculate exchange rate volatility. Economic and monetary policy uncertainties are measured using news-based indices, while global financial market volatility is measured using the implied volatility index. Panel autoregressive distributed lag modeling is used to analyze the impact of uncertainty on exchange rate volatility in the short and long run. The sample consists of 26 developed and emerging markets from 2005 to 2020.FindingsThe study finds that economic policy uncertainty significantly increases exchange rate volatility. Similarly, global financial market uncertainty leads to increased exchange rate volatility. The effect of US monetary policy uncertainty reduces exchange rate volatility.Originality/valueThis research contributes to the existing literature on exchange rate fluctuations by examining the impact of uncertainties on exchange rate volatility. The study uses novel news-based indices for measuring economic and monetary policy uncertainties and includes a broader sample of emerging and advanced markets. The findings have important implications for investors and policymakers.

Monetary policy responses to COVID-19 in emerging European economies: measuring the QE announcement effects on foreign exchange markets

This paper examines the effects of quantitative easing (QE) announcements by emerging market central banks in Europe during the COVID-19 pandemic, particularly on exchange rates with a higher frequency setting. Two different methodologies are used for analysing the policy announcement effects. The first methodology is the event study method that measures the sample exchange rates’ mean and cumulative mean abnormal return around the time of event. The second one is the time series approach that measures asymmetric behaviour of the exchange rate volatility to monetary policy shocks by employing exponential GARCH model. The results show that the foreign exchange markets respond to QE announcements in all selected countries. The response of exchange rates varies across countries and event windows. QE announcements cause appreciation of domestic currency in Hungary and Poland, and depreciation in Turkey. Additionally, the QE announcements increase exchange rate volatility in Hungary and Poland while they reduce volatility in Turkey. The asymmetric behaviour of domestic currencies prevails in all selected countries, but this asymmetry is sensitive to the exchange rate and the length of the window.

Does Central Bank Transparency Deter the Exchange Rate Volatility? New Evidence from Asian Emerging Markets

Abstract Exchange rate volatility has emerged as a significant challenge for Asian emerging markets since the adoption of the liberalization process. This study examines the influence of central bank transparency on exchange rate volatility using a sample of ten important Asian emerging markets. The study uses a fixed effect regression model covering the Asian financial crisis, global financial crisis, banking crisis, and taper tantrum episodes. Results show that an increase in central bank transparency has a stabilizing effect on exchange rate volatility, and this effect remains even after controlling for various internal and external factors. The uncertainty of US monetary policy increases exchange rate volatility, while US economic policy uncertainty contributes only during the global financial crisis. Interestingly, central bank transparency buffers the effects of the global financial crisis, indicating that it plays a facilitating role in maintaining financial stability. Studies that examine the role of central bank transparency in curbing exchange rate volatility, which is a crucial issue in these markets, are rare in emerging markets’ context. This research offers interesting findings by using a variety of robustness checks.

Threats to central bank independence and exchange rate volatility: High-frequency identification with Trump’s Fed tweets

This study presents market-based evidence that threats to central bank independence increase exchange rate volatility. We use Trump’s tweets that criticize the Fed’s monetary policies and advocate lower interest rates as a proxy for threats to central bank independence. We find that intraday exchange rate volatility rises following Trump’s Fed tweets. Moreover, this relation is more pronounced for the tweets with greater market attention and more negative sentiment. Our findings suggest that market participants do not perceive the Federal Reserve as independent from political pressure.

The Exchange Rate Volatility and Moroccan Exports: An Empirical Investigation

This article aims to study exchange rate volatility and its impact on exports. We examine using a VECM model the relationship between Moroccan exports and the volatility of the real effective exchange rate, over a period from the first quarter of 2000 to the first quarter of 2017. The methodology adopted takes into account the long-term relationship term between the variables, using the moving standard deviation as a measure of volatility and real-world GDP as a proxy for global demand. Although a large number of empirical studies find that exchange rate volatility tends to reduce the level of foreign trade. Our results indicate that the increase in exchange rate volatility has a positive effect on the demand for Moroccan exports. Also, the short-term dynamics show that the Granger causal effects of volatility on real exports are significant. Moreover, this article joins the empirical studies that confirm the risk-loving behaviour of exporters in the face of risk of fluctuating exchange rates.

External Debt and Real Exchange Rate Volatility in South Asia

This study empirically examines the mechanism that connects debt accumulation to exchange rate volatility through the lens of important macroeconomic variables in South Asian Countries. One of the most influential explanatory factors behind exchange rate volatility is deemed as the flow of external debt for these countries. Using data from the World Development Indicators for the period 1980–2020, it is shown that external debt increases exchange rate volatility, significantly. The model is identified via panel Granger tests for relevant variables, estimated for a wide range of covariates and tested for all possible sources of endogeneity via subsequent robustness analyses. JEL Classification: C33, F31, H6, O53

Climate change and macroeconomic policy space in developing and emerging economies

This paper addresses the macroeconomic challenges stemming from the double affectedness of climate change and dependence on external finance in peripheral countries. The paper uses the Post-Keynesian concept of an asset’s own rate of return to assess how susceptibility to the combined effects of erratic capital flows and the vulnerability vis-à-vis the physical and transitional risks of climate change reduces macroeconomic policy space. Climate change and mitigation strategies are said to contribute to financial instability ensuing flight-to-quality of international investors. This translates into higher external financial fragility in low income countries with a high degree of commodity dependence—with increased exchange rate volatility and devaluating pressure deteriorating affected countries’ currencies’ liquidity premia and the expectation of their short-term exchange rates as result. Consequently, policy-makers in affected countries are forced to commit to investor-friendly policies and high interest rates to uphold their currencies’ acceptance. The susceptibility to the physical risks of climate change and mitigation hence contributes to the self-perpetuating nature of international monetary asymmetries and hierarchies.

Exchange rate misalignments, capital flows and volatility

This study investigates the effect of three dimensions of exchange rate misalignments—(i) distance (absolute misalignments), (ii) direction (overvaluation or undervaluation), and (iii) degree (small or large misalignments)—on the overall as well as short-cycle exchange rate volatility. Using data from 1988 to 2014, we find that relative PPP-based exchange rate misalignments increase exchange rate volatility. For developed and developing countries, this increase in volatility is driven mainly by large undervalued misalignments of the U.S. dollar. This finding might be linked to interventions targeting the loss in domestic producers’ competitiveness in global markets. Interestingly, in the case of developed countries, we find this adverse effect on exchange rate volatility also for small absolute misalignments; exchange rate movements close to equilibrium may be associated with ambiguity with respect to future movements in developed countries, which can result in higher exchange rate volatility. Further, the results suggest that, when the dollar is highly undervalued, capital flows have a stabilizing effect on exchange rate volatility in developed countries but a destabilizing effect in developing countries. The finding is consistent with investors’ strategy of taking exchange rate overvaluation and undervaluation into account when engaging in cross-border investments.

The cost of foreign-currency lending

Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads somewhere in the range between 5.5 and 16.1 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately 1 to 3 USD million for loans of average size and duration. We also show that this finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets, and that borrowers can lower the extra cost by forming strong lending relationships with their banks.

The U.S.‐Canadian trade and exchange rate uncertainty: Asymmetric evidence from commodity trade

AbstractAlthough the main goal of the original NAFTA treaty was to promote trade among the U.S., Canada, and Mexico, exchange rate uncertainty among the members is still a factor affecting trade. A previous study that assessed asymmetric effects of the real peso‐dollar volatility on trade flows between Mexico and the U.S. used the nonlinear ARDL approach and found that increased (decreased) volatility hurts (boosts) exports of nearly 50% of the industries that trade between the two countries. In this paper, we carry out the same analysis using trade data from 34 (24) large U.S. exporting (importing) industries to (from) Canada. We find that nearly 38% of the industries are affected by the U.S. dollar‐Canadian dollar volatility. However, the majority of the affected industries export more when exchange rate volatility increases or decreases. It appears that traders are more risk tolerant in the case of U.S.‐Canada trade but risk averse in the case of U.S.‐Mexico.

THE IMPACT OF REAL EXCHANGE RATE VOLATILITY ON FOREIGN DIRECT INVESTMENT INFLOWS IN TUNISIA

This article aims to determine the impact of the Real Effective Exchange Rate (REER) and its volatility on Tunisian Foreign Direct Investment (FDI) Inflows for the period from 1980 to 2018. By applying the Auto Regressive Distributed Lag (ARDL) model, we noticed that an increase in exchange rate volatility tends to lower FDI inflows over a long-term horizon. We have also shown that an increase in REER, equivalent to a real appreciation (quotation at certain), will decrease FDI. While in the short term, the relationship between REER and FDI is positive, while volatility retains its negative long term effect.Keywords: Foreign Direct Investment, Real Effective Exchange Rate Volatility, ARDL Model, TunisiaJEL Classifications: C130, G150, F310DOI: https://doi.org/10.32479/ijefi.11882

Risk-premium shocks and the prudent exchange rate policy

Using a medium-size New Keynesian open economy model, we examine the issue of a prudent exchange rate policy when the economy encounters an adverse risk-premium shock. We show that the shock leads to terms of trade (ToT) deterioration and an increase in both the aggregate output and inflation. While examining the choice of an appropriate exchange rate policy to deal with the effects of the shock, analytical results of our baseline model show that neither a fully flexible nor a fully pegged exchange rate policy can yield the desired outcome. In the absence of the supply-side effects of ToT and a cost channel of monetary policy, a managed exchange rate policy can stabilize both domestic inflation and aggregate output. However, in the presence of either a cost channel of monetary policy or supply-side effects of the ToT or both, the central bank faces a trade-off between aggregate output and domestic inflation stabilization. We find that the presence of a cost channel of monetary policy gives rise to a pro-cyclical exchange rate policy. Simulation of a more general model suggests that, instead of using the conventional Taylor rule, the central bank should follow a ToT-augmented Taylor rule, which involves further monetary tightening as the ToT deteriorates. We find that the need for monetary tightening is linked to both the nominal and real rigidities in economy, which gives rise to increased exchange rate volatility. We also briefly consider the case of a productivity shock.

Exchange Rate Volatility and Commodity Trade between U.K. and China: An Asymmetric Analysis

Our goal in this paper is to assess short-run and long-run effects of the real yuan-pound rate volatility on the U.K. exports to China and Chinese exports to the U.K. When a linear export model was estimated for each of the 70 industries, we found short-run effects on 43 (53) British (Chinese) exporting industries to China (the U.K.) and which lasted into the long run in 17 (28) British (Chinese) industries. However, when a nonlinear model was estimated, we found short-run asymmetric effects on 58 (67) British (Chinese) exporting industries that lasted into the long in 42 (52) British (Chinese) industries, mostly in an asymmetric manner. Our findings were industry specific but in general, while increased exchange rate volatility hurt British export to China in most industries, it actually boosted Chinese exports to the U.K., in most industries. On the other hand, decreased volatility boosted exports of some British industries, but it hurt exports of some Chinese exporting industries.

Exchange-traded funds and FX volatility: Evidence from Turkey

Exchange-Traded Funds (ETFs) have become one of the most popular passive investment instruments since they bring together the advantages of stocks and mutual funds. As passive investors are more risk averse and sensitive to possible adverse market developments, ETF’s fund flows can provide distinct information in certain periods in comparison with active funds. This study looks at ETF fund flows in foreign exchange uncertainty by using EGARCH models, together with added control variables. The main results are that the large inflows of ETFs increases exchange rate volatility for contemporaneous and lagged effect models, yet large outflows have a negative and statistically significant effect on the exchange rate volatility in lagged variance equation. These findings suggest an asymmetric behavior as outflows of ETFs are followed by an exchange rate depreciation with less exchange rate FX uncertainty, while significantly large inflows of ETFs lead to higher FX uncertainty.

Effects of Exchange Rate Volatility on Trade: Evidence from West Africa

The objective of this paper has been to investigate the impact of exchange rate volatility on trade in the context of exports, imports, and the trade balance in West Africa. Applying the pooled Ordinary Least Square, the fixed effects, and the random effect models, and obtaining robust estimates for export and trade balance models by employing xtgls, panels (correlated) Corr (ar1), and adopting xtscc, fe regression with Driscoll-Kraay standard error to estimate the import model. The empirical results show that the impact of exchange rate volatility on exports and imports is insignificant. However, the result of the trade balance model shows a positive and significant link between exchange rate volatility and the trade balance. Thus, suggesting that traders tend to engage more in export activities with an increase in exchange rate volatility. Also, the analysis suggests that depreciation of the real exchange rate will lead to a decrease in exports. Thereby, confirming the limited production capability and heavy reliance on imported goods and services. Hence, this study recommends diversification of production activities and adopting strategies aiming at reducing dependence on imported goods and services. The empirical result shows a positive association between an increase in domestic economic activities of trading partners and exports of the West African countries. This implies that West African countries must engage in trade with countries that have a high economic growth rate. The result also shows a positive link between inflation rate and imports. This suggests the implementation of effective monetary policies geared towards controlling inflation.

Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia

Abstract Whether or not inflation targeting adoption leads to increased volatility of exchange rates is controversial. The volatility increases with inflation targeting as a result of the flexible exchange rate regime. Others argue that inflation targeting delivers the best outcomes in terms of lower exchange rate volatility. The purpose of this paper is to investigate whether interest rate policy in inflation targeting frameworks – that is subjected to control inflation rate – may reduce the volatility of exchange rates. To test the hypothesis, we use monthly data in the case of Indonesia over the period 2005(7)-2016(7). Several control variables are introduced in the regressions. The result of the autoregressive distributed lag model proves the interest rate policy and foreign exchange intervention fail to reduce the exchange rates volatility. It seems inflation targeting in Indonesia puts too much emphasis on stabilizing the domestic currency thus leading to benign neglect of stabilizing its external value, ultimately resulting in increased exchange rate volatility. These findings suggest that central bank credibility plays an important role in conducting inflation targeting policy which operates primarily through a signalling effect.