Foreign Exchange Rate Volatility Research Articles

Flight-to-safety across time and market conditions

This paper examines the time-varying directional predictability from the implied volatility of risky assets, such as US stocks, to the implied volatility of less risky or safe haven assets, such as gold, cryptocurrency, foreign exchange rates, and US Treasury notes, which allows for making time and regime dependent inferences on the flight-to-safety phenomenon. The results show a positive directional predictability from the VIX to the implied volatility of gold, cryptocurrency, and foreign exchange rates in periods of high market uncertainty such as the COVID-19 outbreak and the war in Ukraine. The volatility of US Treasury notes has a different response dynamic to the VIX, switching to negative cross-correlations in some cases, given its tight link to inflationary pressure and economic policy uncertainty. The main results remain qualitatively unchanged after incorporating economic policy uncertainty and oil volatility. An additional analysis indicates that flight-to-safety is not exclusively triggered by the high volatility regime in US equities but happens at median levels too. Our findings have important implications for investors, risk managers, and policymakers regarding volatility predictability, hedging, and market stability.

The Effect of Global Monetary Policy Changes on the Financial Strategy of International Companies

In the interconnected global economy, the financial strategies of international corporations play a crucial role in navigating the dynamic landscape shaped by various factors, including monetary policies set by central banks worldwide. This narrative explores the intricate interplay between global monetary policy changes and the financial strategies of multinational corporations, investigating how shifts in these policies reverberate across borders, impacting corporate decision-making, risk management, and performance. Over recent decades, significant transformations in monetary policy frameworks have occurred, driven by evolving economic paradigms, financial crises, and geopolitical dynamics. Central banks have deployed a range of tools, from conventional inflation targeting to unconventional measures like quantitative easing, to stabilize economies and stimulate growth. However, the effectiveness and unintended consequences of these policies transcend domestic boundaries, permeating the international financial system and shaping the strategic imperatives of multinational corporations. The impact of global monetary policy changes on international companies' financial strategies is substantial. U.S. monetary policy shocks notably affect foreign firms, especially those with extensive global production linkages and financial constraints. Financial globalization has made domestic financial conditions more vulnerable to external shocks, reinforcing the case for price stability as an optimal monetary rule. The volatility of foreign currency exchange rates significantly affects international budgeting, while multinationals with foreign involvement exhibit lower leverage ratios and rely more on short-term borrowing. One primary channel through which global monetary policy changes influence international companies is by altering financing costs and access to capital. Changes in interest rates and liquidity conditions affect borrowing costs for firms operating across borders, impacting investment decisions, capital allocation, and capital structure optimization. Additionally, these changes induce currency fluctuations and volatility, necessitating robust currency risk management strategies to safeguard revenues and mitigate exchange rate exposure. Furthermore, global monetary policy changes affect asset prices, financial markets, and investor sentiment, shaping the risk-return dynamics faced by international companies. Expansive monetary policies often fuel asset price inflation and influence investment strategies, while abrupt policy shifts can trigger market dislocations and liquidity constraints. Beyond financial markets, monetary policy changes influence macroeconomic variables, such as economic growth, inflation, and trade patterns, shaping international companies' operating environments and strategic decisions. In conclusion, the interconnectedness of global financial markets accentuates the importance of agility, flexibility, and strategic foresight for multinational corporations in navigating the impact of monetary policy changes on their financial strategies and overall performance.

The clarity of monetary policy communication and financial market volatility in developing economies

This study investigates the effect of the clarity of monetary policy statements (MPSs) on financial market volatilities by employing linguistic analysis and a panel fixed effects estimator for a newly built dataset drawn from the MPSs of 21 developing countries. Our results show that MPS clarity, measured by complexity and readability indices, negatively affects foreign exchange rate volatility, a key policy variable in developing economies, suggesting that clear central bank communication can reduce financial market volatility. Given the low literacy levels in developing countries, their central banks should make an extra effort to write statements that are easy to comprehend.

Analyzing the Effect of Oil Price Fluctuation on East Africa’s Foreign Exchange Ratevolatility

Oil is one of the major sources of energy in the world today, therefore many sectors of the economy are directly or indirectly dependent on oil as a source of energy. These has made oil price fluctuation to one of the most sort after macroeconomic variable due to its potential effects on the global economy. The primary objective of this paper was to investigate the effects of oil price shocks on foreign exchange rate of the three East African countries using SVAR analysis for the period from 1990 to 2022. Our empirical evidence confirmed that the increase in the price of crude oil in leads to a positive change in foreign exchange to the Dollar, the SVAR estimation confirmed positive significant effect of oil price fluctuation on foreign exchange trends, the results of the IRF pointed out oil price fluctuation positively affect the East Africa’s foreign exchange performance and finally the FEVD of oil price fluctuation on foreign exchange reflected that there exist indirect effects of oil price fluctuation on foreign exchange as well as foreign exchange influencing oil price after the second period. Based on these findings we therefore conclude that crude oil price fluctuations contribute significantly to the foreign exchange variability in the East African countries and hence affecting other sectors of the economy inversely.It is on this ground that we recommend adoption of policies that will reduce this effect on this countries, to start with to reduce the burden the countries should look for alternative locally available source of power that include adoption of Bi-diesel, compressed methane that can be source from sugar cane give the un tapped potential of sugar can in the three countries. In addition, the countries can consider price hedging of oil purchases where the countries enter into contract with their oil supplies for a constant crude oil price over the contract period.

Testing the Cointegrating Relationship between Foreign Exchange Rate Volatility and Government Health Expenditure

This paper examined the relationship between government health care expenditure and foreign exchange rate volatility in Nigeria for the period 1993-2022. We employed the multivariate cointegration technique proposed by Johansen and found the existence of at least one cointegrating vector describing a long run relationship between government health care expenditure and foreign exchange rate volatility. It is therefore suggested that an appreciable proportion of the national budget be allocated to the health care services to have a more robust health care programmes capable of fostering health development in Nigeria. The research was conducted with an objective to understand the dynamics between healthcare expenditures and the volatility in foreign exchange rate with a focus on Nigeria, enabling better policy making. The overall conclusion is that the Nigerian government health expenditure is largely dependent that its healthcare policy is not stable and sufficient is not largely dependent on volatility foreign exchange rate. However, government health expenditure is a concern for Nigeria.

Dependence between foreign trade performance and exchange rate volatility: Panel ARDL approach

Abstract The purpose of this study is to analyse the influence of exchange rate shocks on foreign trade (exports and imports) of fifteen economies within the ECOWAS sub-region. To accomplish the goal of this paper, Autoregressive Distributed Lag (ARDL) procedure was employed to investigate the impact volatility in the exchange rate market has on foreign trade in both long- and short-term with data between 1980 and 2020. To compute volatility, it relied on the GARCH (1, 1) model which predicted the conditional variances as proxy for volatility. Our empirical results are distinguished into export model and import model, and reveal that volatility in exchange rate influence foreign trade performance (exports and imports) negatively in the short-run, though statistically insignificant. The impact however becomes positive in the long run, and statistically significant for the two models. These results signpost that while the volatilities in foreign exchange market appear to deteriorate the international trade of these economies in the short-term, it substantially and significantly causes its improvement in the long-term. Hence, our results validate the J curve effect in the case of these ECOWAS economies. Policy implication from the findings suggests that to develop a robust international trade and ultimate economic growth, it is recommended that policymakers of these economies maintain a short-term stability in their foreign currency markets by way of adopting some intervention measures.

Evaluating the Influence of Foreign Exchange Policy Regime on the Construction Sector in Nigeria

In developing economies, foreign exchange policy regime (FEPR) play a critical role in the viability of all sectors of the economy. In Nigeria, the economy is dependent on foreign inputs from contracting services, technology, materials, expatriates, etc. Therefore, this study investigated the impact of FEPR on the performance of the construction sector in Nigeria. To achieve this goal, time series data was extracted from United Nations Statistics Division (UNSD) on the construction sector, gross domestic product (GDP) and FEPR for 50 years spanning from 1970 to 2019. The study uses econometric approach including tests of stationarity and co-integration as well as the generalized method of moment (GMM) to model the relationships between the variables. The study reveals that the 1986 FEPR reform had significant and negative effect on the construction sector output in Nigeria. This implies that the performance of the construction sector is affected by the state of the economy and government policy. This study proves that the foreign exchange policy regime does not significantly influence the construction industry during the period of review. It also ascertained that the development of the construction sector depends more on previous construction outputs and only altered due to oil export shock. Hence, this study recommends that sustainable construction development strategies should be implemented to eliminate construction sector challenges and reduce the effect of foreign exchange rate volatility on the construction sector. Finally, monetary and fiscal policies that can engender sustainable growth and development of the construction sector should be implemented.

Investment, Exchange Rate and Exports Nexus within the South African Automotive Industry

The automotive industry is one of the South African industries that contribute to the manufacturing output and exports and plays important to the country’s economic performance. However, the export volume from this industry depends on various economic factors that include foreign direct investment, domestic investment and exchange rate volatility. The current study aims to determine empirically these three variables on the export volume in the South African automotive industry. To achieve this objective, the authors applied the autoregressive distributed lag (ARDL) model, ECM and causality test on quarterly time series data from 2008 to 2021. The study findings reveal that in the long run, domestic investment has a dominant positive effect on exports from the automotive industry. However, while both domestic investment and exchange rate are inversely related to the export in the short run, foreign direct investment is positively significant to increase export levels. The study recommends, based on these findings, the implementation of strategies that enhance growth in domestic investment and cautious management of foreign direct investment as the latter is more effective in the short run. Additionally, the monetary policymakers should, in each policy introduced and implemented, aim for the stability of the domestic currency and its effect on exports, especially in the automotive industry.

Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis.

Research on the exchange rate volatility and dynamic conditional correlation of African currencies/financial markets interdependence appears to be limited. In this paper, we employ GARCH models to characterize the exchange rate volatility of eight major African currencies. The variation of interdependence with respect to time is described using the DCC-GARCH model. From the results of the DCC, remarkable variations in correlations through time across these countries are observed with the correlations varying from low to moderate, suggesting that African economies are generally governed by certain economic factors and are vastly regulated. These regulations, including exchange rate misalignment led to sluggish and negative growth in most of the African countries. For instance, persistent misalignment can cause high levels of inflation, for example, undervaluation. Overvaluation can lead to trade imbalances and they can in turn create macroeconomic instability and balance of payment problems. Given these results, we suggest that policy makers should revamp and adopt state resilience so as to reduce the negative effect of exchange rate misalignment on economic growth.

Foreign Exchange Rate Volatility and Its Effect on International Trade in Kenya

Exchange rate volatility has received much attention in economic research especially with the advent of floating exchange regimes. The volatile nature of exchange rate is generally perceived as having negative affect on international trade. However, the theoretical and empirical perspective are mixed on the nature of the relationship. This study aimed at examining analyzing the moderating effect of foreign exchange reserves on the relationship between foreign exchange rate volatility and international trade in Kenya. The study used error correction model in the analysis of the time series data for the study period which spanned between 1966-2018. Results show that controlling for inflation rate, interest rate and gross domestic product, foreign exchange reserves had a positive and statistically significant moderating effect at 5% significant level on the relationship between foreign exchange rate volatility and international trade with R2 of 0.9557. The study recommends maintaining enough stock of foreign exchange reserves to cushion the economy from adverse effects of exchange rate volatility. The findings of the study will provide relevant information in the formulation of and implementation of an effective monetary policy that will promote exchange rate stability and improve the country’s performance in international trade.

Effect of COVID-19 Pandemic on Foreign Exchange Rate Volatility: The Nigeria experience

The outburst of the Covid-19 brought anxiety that led to social distancing, staying at home, restrictions in traveling locally and internationally, and finally, the financial instability globally as many economic activities shut down. Consequently, the study examined the effect of the coronavirus pandemic on exchange rate volatility from February 29, 2020, to March 31, 2021. The study utilized two-time series data which were sourced from daily reports on covid-19 from the Nigerian Centre for Disease Control (NCDC) and daily exchange rates US$/Nigerian₦ from the Central Bank of Nigeria (CBN) statistical bulletin. The study used Error Correction Model (ECM) to analyze the data. The bound test was used in the survey to establish a level of association between the independent variables and the regressor set. The findings revealed that daily reported COVID-19 instances, daily death cases, and cumulative death cases had a positive effect on Nigerian exchange rate volatility. Conversely, confirmed cumulative coronavirus cases do not impact the exchange rate in Nigeria in the short run. Coronavirus significantly affected all macroeconomic indices, including the exchange rate. The study will be helpful to the government and its agencies in the determination of the palliatives for the needy citizens. It will also help the policymakers to develop strategies that can stabilize the economy and health sector to reduce the effect of the pandemic on the citizenry.

Effect of COVID-19 pandemic on foreign exchange rate volatility: The Nigeria experience

The outburst of the Covid-19 brought anxiety that led to social distancing, stay at home, restriction in traveling locally and internationally, and finally, the financial instability globally as many economic activities shut down. Consequently, the study examined the effect of the coronavirus pandemic on exchange rate volatility from February 29, 2020, to March 31, 2021. The study utilized two-time series data which were sourced from daily reports on covid-19 from the Nigerian Centre for Disease Control (NCDC) and daily exchange rates US$/Nigerian₦ from the Central Bank of Nigeria (CBN) statistical bulletin. The study used Error Correction Model (ECM) to analyze the data. The bound test was used in the survey to establish a level of association between the independent variables and the regressor set. The findings revealed that daily reported COVID-19 instances, daily death cases, and cumulative death cases had a positive effect on Nigerian exchange rate volatility. Conversely, confirmed cumulative coronavirus cases do not impact the exchange rate in Nigeria in the short run. Coronavirus significantly affected all macroeconomic indices, including the exchange rate. The study will be helpful to the government and its agencies in the determination of the palliatives for the needy citizens. It will also help the policy makers to develop strategies that can stabilize the economy and health sector to reduce the effect of the pandemic on the citizenry

Premiums between Cross‐listed Shares: Determinants and Assessment of Financial Reform Policy Effectiveness

AbstractThis paper explores determinants of price premiums between A‐share and American depositary receipts (ADR) or H‐share and sheds light on policies using daily data from cross‐listed companies from 2002–2020. Market sentiment and financial openness are critical in explaining both types of price premiums. Expected exchange rate changes significantly impact the A‐share versus ADR premium but liquidity is essential for the A‐share versus H‐share premium. The introduction of Shanghai–Hong Kong Stock Connect in November 2014 has effectively increased the price discovery capacity of the A‐share market, and investors were more adaptive to the RMB foreign exchange rate volatility after Chinese exchange rate system reform in 2015. The paper provides insights into future capital market reform in China.

Impact of Currency Futures Issuance on Foreign Exchange Rate Volatility in India

Impact of Currency Futures Issuance on Foreign Exchange Rate Volatility in India

A sentiment-based risk indicator for the Mexican financial sector

We apply sentiment analysis to Twitter messages in Spanish to build a sentiment risk index for the financial sector in Mexico. We classify a sample of tweets from 2006-2019 to identify messages in response to a positive or negative shock to the Mexican financial sector, relative to merely informative ones. We use a voting classifier approach based on three different classifiers: one based on word polarities from a pre-defined dictionary, one based on a support vector machine classifier, and one based on neural networks. We find that the voting classifier outperforms each of the other classifiers when taken alone. Next, we compare our sentiment index with existing indicators of financial stress based on quantitative variables. We find that this novel index captures the impact of sources of financial stress not explicitly encompassed in quantitative risk measures, such as financial frauds, failures in payment systems, and money laundering. Finally, we show that a shock in our Twitter sentiment index correlates positively with an increase in financial market risk, stock market volatility, sovereign risk, and foreign exchange rate volatility.

Forecasting Foreign Exchange Volatility Using Deep Learning Autoencoder-LSTM Techniques

Since the breakdown of the Bretton Woods system in the early 1970s, the foreign exchange (FX) market has become an important focus of both academic and practical research. There are many reasons why FX is important, but one of most important aspects is the determination of foreign investment values. Therefore, FX serves as the backbone of international investments and global trading. Additionally, because fluctuations in FX affect the value of imported and exported goods and services, such fluctuations have an important impact on the economic competitiveness of multinational corporations and countries. Therefore, the volatility of FX rates is a major concern for scholars and practitioners. Forecasting FX volatility is a crucial financial problem that is attracting significant attention based on its diverse implications. Recently, various deep learning models based on artificial neural networks (ANNs) have been widely employed in finance and economics, particularly for forecasting volatility. The main goal of this study was to predict FX volatility effectively using ANN models. To this end, we propose a hybrid model that combines the long short-term memory (LSTM) and autoencoder models. These deep learning models are known to perform well in time-series prediction for forecasting FX volatility. Therefore, we expect that our approach will be suitable for FX volatility prediction because it combines the merits of these two models. Methodologically, we employ the Foreign Exchange Volatility Index (FXVIX) as a measure of FX volatility. In particular, the three major FXVIX indices (EUVIX, BPVIX, and JYVIX) from 2010 to 2019 are considered, and we predict future prices using the proposed hybrid model. Our hybrid model utilizes an LSTM model as an encoder and decoder inside an autoencoder network. Additionally, we investigate FXVIX indices through subperiod analysis to examine how the proposed model’s forecasting performance is influenced by data distributions and outliers. Based on the empirical results, we can conclude that the proposed hybrid method, which we call the autoencoder-LSTM model, outperforms the traditional LSTM method. Additionally, the ability to learn the magnitude of data spread and singularities determines the accuracy of predictions made using deep learning models. In summary, this study established that FX volatility can be accurately predicted using a combination of deep learning models. Our findings have important implications for practitioners. Because forecasting volatility is an essential task for financial decision-making, this study will enable traders and policymakers to hedge or invest efficiently and make policy decisions based on volatility forecasting.

9KDeterminants of Foreign Exchange Rate Volatility and Non-Oil Export in Nigeria

9KDeterminants of Foreign Exchange Rate Volatility and Non-Oil Export in Nigeria

Foreign exchange rate volatility smiles and smirks

AbstractWe study the implied volatilities of three foreign exchange (FX) option markets: EUD/USD, GBP/USD, and AUD/USD. We find that they are distinct from each other. The implied volatilities of the EUD/USD market tend to be more U‐shaped than those of other markets. Local volatility models such as the constant elasticity of variance (CEV) model and stochastic volatility models, such as the Heston model, may fail to capture this type of convexity. We choose a stochastic‐local volatility model to obtain an implied volatility formula for the corresponding FX options. The formula is given by the CEV formula with additional terms reflecting the (pure) stochastic volatility nature of FX rates. Based on this result, we show that the stochastic‐local volatility model is a suitable universal choice for the pricing of these FX options.

An impact of bank rate and inflation rate on volatility of foreign exchange rate in India

Foreign exchange rate, inflation rate and bank rate are important macro-economic factors that determine the growth of the Indian economy. The main purpose of this study is to analyse the effect of two important macro-economic factors viz - bank rate and inflation rate on fluctuating foreign exchange rate. This study is based on secondary data and the time period from 2009-2010 to 2017-2018 is considered for this study. Bivariate correlation and regression model are used to investigate and analyse the effect of both variables on foreign exchange rate. It is found that the relationship between bank rate and USD/INR is positive while the association between inflation rate and foreign exchange rate is highly negative. Besides, there is considerable effect of both factors on USD/INR. Hence, efficient monetary policy by the government and RBI need to be initiated to reduce and stabilize both rates and alleviate the value of Indian Rupees.

Modelling the Volatility of Stock Indices and Foreign Exchange Rates in BRICS : Empirical Evidence from GARCH Models

Modelling the Volatility of Stock Indices and Foreign Exchange Rates in BRICS : Empirical Evidence from GARCH Models