Exchange Rate Volatility Research Articles

Nexus between Exchange Rate Volatility and Economic Growth: A Theoretical Review

Nexus between Exchange Rate Volatility and Economic Growth: A Theoretical Review

Effect of Economic Policy Uncertainty on Exchange Rate Volatility in Pakistan

This study examines the effect of economic policy uncertainty on Pakistan’s exchange rate. Pakistan’s exchange rate always remains under pressure due to the widening inflow-outflow gap in foreign exchange. The volatile exchange rates make it harder for businesses to invest and make inflation more uncertain, which ultimately slows down productivity and GDP growth. Due to the close linkages of the exchange rate with the economic indicators, it is required to examine the effect of different economic variables on the exchange rate and its volatility by incorporating the role of economic policy uncertainty. The study uses the sample of Jan 2011 to Dec 2022 for the empirical results. The study employs the EGARCH model for empirical results. The aftermaths of the mean equation of the EGARCH model suggest that economic policy uncertainty has a positive effect on Pakistan’s exchange rate. Moreover, an increase in the economic policy uncertainty scale, increases the volatility in Pakistan’s exchange rate. The primary source of exchange rate volatility is the nominal variable rather than the real variables. On the basis of the study’s findings, certain relevant recommendations were given in order to stabilize the foreign exchange market in Pakistan.

Exploring the Influence Dynamism of Economic Factors on Fluctuation of Exchange Rate - An Empirical Investigation for India Using ARDL Model

The Indian Foreign Exchange Market has experienced significant changes over the past decade, due to high degree of instability of the Indian Rupee leading to its devaluation against major global currencies. Exchange rate is considered as one of crucial indicators to determine the economic growth. Volatility of exchange rate of each day is influenced by various factors such as demand and supply, Gross Domestic Product, Interest rate, employment rate, public debt, balance of payments, inflation etc. Though there are multiple causes to determine the movement of exchange rate, but still the accurate level of causation is unpredictable. Keeping this in mind, this paper tries to attempt the relationship that exists between the exchange rate and select macroeconomic factors. To analyse the extent of influence of the selected variables on the exchange rate, the research paper uses 10 years of data spanning from Jan 2013 to Nov 2022. Further, the study uses monthly data of above-mentioned variables to bring out the analysis to meet the objectives. Descriptive statistics is used to find the characteristics of the data, correlation analysis and Ordinary Least Square method is used to find the relationship and impact level select macroeconomic factors on exchange rate. Autoregressive Distributed Lag (ARDL) model is used to find if any short run and long run association exists between the variables and the exchange rate.

THE NEXUS BETWEEN FOREIGN DIRECT INVESTMENT AND NOMINAL EXCHANGE RATE, REAL GDP, AND CAPITAL STOCK IN TANZANIA

Aim: The paper aims to examine the relationship between FDI and the nominal exchange rate, real GDP, and capital stock in Tanzania using quantitative research methods and an econometric analysis. The analysis aims to provide insights into the factors that affect FDI and contribute to the existing literature on the relationship between FDI and economic growth. Methods: This study examines the relationship between FDI inflow, real GDP, capital stock, and the normal exchange rate in Tanzania using a robust research methodology. The study employs STATA 15 software and Akaike’s Information Criteria (AIC), Schwarz Information Criteria (SC), Final Prediction Error (FPE), and the Hannan Quinn (HQ) Information Criteria. In addition, the autoregressive model, the Johansen co-integration test, and the Toda-Yamamoto Granger causality (modified WALD) test were employed to determine the optimal lag. Results: The results indicate a bidirectional relationship between the nominal exchange rate and FDI in Tanzania, with FDI inflows influencing the nominal exchange rate volatility and vice versa. Furthermore, the results indicate that real GDP, capital stock, and the nominal exchange rate exert a unidirectional influence on FDI influx in Tanzania. Conclusions: The nominal exchange rate and capital stock have positive and negative correlations with foreign direct investment. Like many other African economies, Tanzania remains vulnerable to external forces despite making significant strides in stabilizing the exchange rate. It is recommended that the Central Bank of Tanzania – along with those of other African nations with similar economic structures – maintain a stable nominal exchange rate level as an incentive for foreign investors in order to increase the inflow of foreign direct investment.

Analisis Risiko Nilai Tukar Mata Uang Asing Dengan Menggunakan Metode Value at Risk (VAR) Pada Bank Muamalat Indonesia

This study aims to measure the maximum potential loss or VaR value for each type of Foreign Exchange based on the calculation results for 1 day, 5 days, and 20 days at Bank Muamalat Indonesia and determine the implementation of risk management applied by Bank Muamalat Indonesia to deal with foreign exchange risk. The research method in measuring Value at Risk of foreign exchange rates uses quantitative methods. The type of data that the author uses in this study is secondary time series data on foreign exchange rates of USD, JPY, EUR, and SAR at Bank Muamalat Indonesia. during the time period 2 January 2018 to 31 December 2018. Data analysis techniques in the study were carried out in several stages, namely calculating exchange rate returns, volatility and daily value at risk. The results showed that the maximum exchange rate risk borne in 1 day, 5 days and 20 days with a 95% confidence level. The implementation of underlying in foreign exchange transactions at Bank Muamalat Indonesia refers to the National Sharia Council regulation No.96 / DSN-MUI / IV / 2015 concerning Sharia Hedging Transactions (Al-Tahawwuth Al-Islami / Islamic Hedging) on Exchange Rates. Bank Muamalat has conducted hedging cooperation with PT Kharisma Pemasaran Bersama Nusantara (KPBN) or Indonesia Commodity (Inacom) on 05 December 2019 as a form of Foreign Exchange Rate risk management.

Return volatility transmission among Asian stock exchanges: Evidence from a heterogeneous market outlook

This pragmatic research strives to reveal the return volatility transmission throughout Asian stock exchanges, by employing variance decomposition technique of Vector autoregressive (VAR) based framework. Additionally, the current examination exerts a Granger causality approach to detect short-term cause and effect among the stock exchanges. The consequence of volatility spill-over exhibits the dominancy of Indian, Chinese and Japanese exchanges in terms of net volatility transmitter. Further, it is found that Korean, Thai, and Malaysian stock exchanges seem to be net receiver of volatility in Asia. Additionally, the outcome of current investigation reveals neutrality of Bangladeshi and Pakistani stock exchange, as the returns volatility of these stock exchange are not influenced by any other Asian stock exchanges. Furthermore, the result of Granger causality analysis signifies the existence of unidirectional causality among the Asian stock exchanges. In terms of policy implication, it is imperative for investors and policymakers to closely monitor the behaviour of the Japanese stock exchange, as it plays a significant role as a net transmitter of volatility to other stock exchanges in Asia. By keeping a vigilant eye on the Japanese stock exchange, investors can better assess and manage potential risks and opportunities in the region.

Effects of real effective exchange rate volatility on export earnings in Ethiopia: Symmetric and asymmetric effect analysis

The exchange rate is one of the key monetary policy instruments used to dictate the economy. However, the effect of exchange rate volatility on macroeconomic outcomes has been a subject of debate in previous research. Thus, this study examined the effects of real effective exchange rate (REER) volatility on Ethiopia's export earnings using quarterly data covering 2007 to 2021. The GARCH model is employed to estimate the volatility of the real effective exchange rate, and its effect is examined at the aggregate and disaggregate levels. Disaggregation is made at commodity and partner country levels. Besides these, the study also examined the symmetric and asymmetric effects of exchange rate volatility on the three categories of export earnings. To estimate the effects, both the linear autoregressive distributed lag (ARDL) and nonlinear ARDL (NARDL) models are employed. The short-run ARDL result shows that the real effective exchange rate and its volatility affect export earnings only in a few cases. Real effective exchange rate appreciation is significant and reduces total export earnings and export earnings from vegetables, meat, and oilseed-related products. Similarly, exchange rate volatility reduces total export earnings and earnings from coffee, vegetables, and meat-related products. At the aggregate level, the NARDL result shows that exchange rate volatility has an asymmetric effect on total export earnings. Positive volatility reduces total export earnings, while negative volatility is not significant. At the commodity level, volatility also has an asymmetric effect on earnings from coffee and meat exports in the short run. However, in the long run, there is no asymmetric effect of exchange rate volatility on total and commodity-level export earnings. In terms of the country of destination, there is no strong evidence of the effect of real effective exchange rate appreciation and its volatility on export earnings. Thus, policies that stabilize the volatility of the exchange rate are needed in Ethiopia in order to enhance export earnings.

Stabilizing global foreign exchange markets in the time of COVID-19: The role of vaccinations

By restoring economic openness, mitigating economic policy uncertainty, and regaining macroeconomic stability, the mass deployment of COVID-19 vaccinations should stabilize foreign exchange (FX) markets. This paper empirically examines the impact of COVID-19 vaccinations on the realized volatility of exchange rates in 30 countries/regions from January 1, 2020, to September 29, 2021. Using the heterogeneous autoregressive model with measurement errors, we find that the COVID-19 vaccine rollout stabilizes global FX markets; this result holds through a series of robustness checks. The stabilizing effect is asymmetric across the quantile levels of FX volatility distribution. Furthermore, the stabilizing effect is more pronounced in emerging markets, countries with high economic policy uncertainty, and nations with greater vaccine confidence.

A Comparative Study of Volatility of Consumer Price Index and Exchange Rate of Ghana Using GARCH Models

A Comparative Study of Volatility of Consumer Price Index and Exchange Rate of Ghana Using GARCH Models

Asymmetric Effects of Exchange Rate Volatility on Taiwan-China Trade: A Non-Linear ARDL Analysis of 20 Industries

Abstract This study investigates the long-run and short-run effects of exchange rate volatility on Taiwan's exports to and imports from China across 20 industries, employing a non-linear autoregressive distributed lag (NARDL) approach. The analysis covers the period from January 2004 to December 2022 and highlights industry-specific sensitivities and asymmetric impacts of exchange rate fluctuations. Our findings reveal the critical role of exchange rate volatility in shaping export and import performance across industries, with both positive and negative shocks exerting significant short-run and long-run effects. Asymmetric impacts of exchange rate fluctuations affect 87.96% of Taiwan's total exports to China in the long run and 72.11% in the short run. In contrast, the asymmetric impacts on imports influence 77.12% of Taiwan's total imports from China in the long run and 13.21% in the short run, demonstrating varying sensitivity across industries. These findings accentuate the necessity for industry-tailored trade policies and strategic considerations to better manage the risks and opportunities presented by exchange rate volatility in cross-strait trade. JEL classification numbers: F14, F31, C22. Keywords: Exchange rate volatility, Taiwan-China trade, Non-linear ARDL, Asymmetric effects.

TVP-VAR Frequency Connectedness Between the Foreign Exchange Rates of Non-Euro Area Member Countries

Abstract Research background The main purpose of monetary integration between EU countries is to eliminate excessive fluctuations in exchange rates. High volatility in exchange rates can cause various negative economic and financial effects, especially during periods of economic shocks. In addition, estimating the volatility between currencies and their interactions is of great importance for effective portfolio management. Purpose The objective of this research is to scrutinize the transmission of volatility between the currencies of those European Union nations that do not participate in the EURO area, focusing on the exchange rate parity of the US Dollar with seven non-EURO zone currencies. Research methodology Daily volatility in exchange rates was calculated using the Garman-Klass-Yang-Zhang (GK-YZ) method. To investigate the connectedness between these volatilities, we used the Time-Varying Parameter Vector Autoregression (TVP-VAR) frequency connectedness approach. Results The Average Total Connectedness Index exhibits a significant degree of connectedness of approximately 71.84%. The Net Total Directional Connectedness Index indicates that the CZK, DKK and RON exchange rates are net beneficiaries in aggregate and in a longer term perspective, whereas the DKK, HUF and PLN exchange rates are net beneficiaries in a shorter term horizon. In the context of major global events such as the onset of the COVID-19 outbreak in March 2020 and the start of the Russia-Ukraine conflict in February 2022, it could be observed that the dynamic Total Connectedness Index exhibited a substantial increase, both overall and from a long-term perspective, corroborating theoretical expectations. According to the Net Pairwise Directional Connectedness index, the highest bilateral connectedness overall and in the short run was between DKK and RON, while in the long run between BGN and DKK. Novelty Examining the connectedness of currencies is of great importance for investors doing business with foreign currency, international cooperation and policies, risk management and portfolio management. Determining the connectedness in different frequency (short and long-term) ranges provides important information for hedging risk. In addition, the bilateral connectedness between currencies is a guide for effective portfolio diversification.

Identifying the external and internal drivers of exchange rate volatility in small open economies

This paper estimates a 3-country DSGE model to identify the drivers of exchange rate volatility in small open economies (SOE). In addition to the usual cross-country linkages through trade and asset holdings, the model features common shocks that affect economies symmetrically. Using data from Jamaica, the US and the G-7 region (excluding the US), the paper finds that external financial shocks are the primary drivers of exchange rate fluctuations in the SOE. While domestic financial shocks are bigger contributors than US and G-7 specific shocks, shocks that are common across the US and the G-7 generally play the main role. Nonfinancial shocks, domestic and external, are inconsequential for exchange rate volatility. Inferences from a vector autoregressive model with exogenous variables are consistent with these results.

Drivers and impacts of inflation: a look at energy prices, exchange rate volatility, and stock markets

In the last decade the world has experienced a number of global crises which triggered economic downturns. Impacts from the global financial crisis, the global COVID pandemic, and Russia’s invasion of Ukraine trigger instability in financial markets. This paper explores similarities and differences between these crises based on inflation and its energy-related components. A Vector Autoregressive (VAR) model is used to analyze both EU-level trends, as well as data for Romania. The findings indicate idiosyncratic shifts in the relationships between variables. The changes are often specific to individual shocks and the policy context. How policy makers respond to these shocks will also impact the fiscal space, the borrowing costs of countries, and the cost of servicing debt, which risks a return to the type of austerity policies that slowed down the post-financial crisis recovery. There is a need for more detailed research and investigations in policy responses designed to respond to ongoing events.

Modelling the Impact of Crude Oil Prices and Stock Price Index on Indonesia’s Exchange Rates

Abstract This paper employs various GARCH-type models and the daily data from 3 July 2006 to 30 June 2021 to examine the effect of crude oil prices and stock price index on exchange rates for Indonesia, the largest oil producer in Southeast Asia. Since the share markets and oil prices are very volatile, testing the stability of the parameters or system is desirable. We achieve this by using the Nyblom’s fluctuations test and account for the structural break associated with the fluctuations. Findings reveal that lower oil price return leads the Indonesian currency per US dollar to depreciate. In addition, we find that stock return has negative and significant relation with exchange rates. This lends support to the portfolio balance effect in which a decrease in stock prices leads to a depreciation of Indonesian Rupiah against the US dollar. Evidence from EGARCH model shows that shocks to the volatility of exchange rate have a symmetrical effect. Our results suggest that as lower oil prices and stock prices contributes to depreciation of Indonesia rupiah against USD, an appropriate monetary policy may require adjustment of interest rates to resist the exchange rate fluctuations without being detrimental to the banking system.

Unraveling Exchange Rate Volatility Impact on Economic Growth: A Study of Developing Countries through the Lens of Exchange Rate Regimes and Financial Openness

Unraveling Exchange Rate Volatility Impact on Economic Growth: A Study of Developing Countries through the Lens of Exchange Rate Regimes and Financial Openness

Unraveling Exchange Rate Volatility Impact on Economic Growth: A Study of developing Countries through the Lens of Exchange Rate Regimes .and Financial openness

Unraveling Exchange Rate Volatility Impact on Economic Growth: A Study of developing Countries through the Lens of Exchange Rate Regimes .and Financial openness

Constructing copulas using corrected Hermite polynomial expansion for estimating cross foreign exchange volatility

A finite order multivariate Hermite polynomial expansion, as an approximation of a joint density function, can handle complex correlation structures. However, it does not construct copulas, because the density function can take negative values. In this study, we propose a formulation of multivariate Hermite polynomial expansion suitable for the application of correction that recovers non-negativity and construct a copula. Several useful expressions for integrals with the copula are derived from this formulation. We also apply this copula to estimate the volatility smile of cross-currency pairs in the foreign exchange option market. In the numerical experiments, we compare the estimation results of the volatility smile of EUR–JPY, GBP–JPY, and AUD–JPY for the proposed and other copulas to confirm the validity of the proposed copula.

Pathways for China's sustainable energy transition: Examining the effects of exchange rate volatility on renewable energy investment

The relationship between exchange rate volatility (ERV) and other macroeconomic factors, including trade flows, domestic production, inflation, money demand, and economic growth, has remained a topic of a large number of studies in international finance. However, the research question that the past empirics have overlooked is whether ERV has any role in helping an emerging economy like China in its journey toward a renewable energy transition. To answer this question, this analysis intends to scrutinize the nexus between ERV and renewable energy investment (REI) in China over 1991Q1-2021Q4. Moreover, due to the asymmetric behavior of ERV, we have based our analysis on the asymmetric assumption. For analyzing the short and long-run impacts of ERV on REI in China, we used the linear autoregressive distributed lag (ARDL) and nonlinear ARDL methods. In the long term, the ARDL model predicts that stricter environmental policies and higher GDP will lead to more investment in renewable energy. As far as the nonlinear model is concerned, the long-term negative change in ERV does not affect REIs, whereas a long-term positive change in ERV reduces such investments. Likewise, unfavorable short-term exchange rate shocks encourage REI while positive short-term shocks discourage such development. Moreover, investment in renewable energy is bolstered by GDP, environmental policy strictness, and financial development, but is dampened by CO2 emissions in the short term in both models. On the basis of these results, we suggest that policymakers should consider implementing measures to stabilize exchange rates to promote investment in renewable energy.

Quantile dependencies between exchange rate volatility and sectoral stock returns in South Africa

ABSTRACT This study assesses the effect of USD-Rand exchange rate volatility on South African sectoral stock returns between 29 March 1996 and 28 July 2022. Using the quantile-on-quantile regression (QQR) technique, we uncover that, although each of the sectors exhibit important idiosyncrasies, there exists a single overarching relationship between exchange rate volatility and stock returns that persists across all sectors. We find that low levels of volatility in the exchange rate have a negative impact on stock returns. Conversely, high levels of exchange rate volatility have a positive impact on stock returns. The most important implication of the findings of this study is that investors should have a keen awareness of movements in both the exchange rate and stock markets.

Effect of Naira/Us Dollar exchange rate volatility on the performance of the stocks market in Nigeria

Purpose: This study investigates the influence of various macroeconomic factors, including the exchange rate, interest rate, inflation rate, and Gross Domestic Product, on the performance of the Nigerian Stock Exchange NSE 100 index. Utilizing a decade of annual data spanning from 2011 to 2021, this research employs the Augmented Dickey-Fuller test to explore the impact of these macroeconomic variables on stock market performance. Research methodology: Within this context, the time series Autoregressive Distributed Lag (ARDL) model is employed to discern the ramifications of naira/US dollar exchange rate volatility on Nigeria’s stock market performance. Results: Multiple regression analysis results indicate a significant negative effect of the exchange rate on share returns, revealing that a 10% increase in the real exchange rate correlates with a 0.15% decrease in the ASPI. Similarly, the inflation rate is associated with a negative coefficient, suggesting an adverse effect on stock prices. In contrast, interest rates and GDP exhibit positive coefficients, with 5% and 10% impacts on the ASPI, respectively. Limitation: All data used in this study were secondary. However, data from previous years were not readily available. This is the main limitation of this study. Contribution: Ultimately, this study underscores the importance of forecasting the exchange rate as a pivotal determinant of business success, offering recommendations for future endeavors.