2020, Volume 73 - Issue 1
RSS feed citation: At RePEc
Publication date: 04 February 2020
THE IMPACT OF EXCHANGE RATE VOLATILITY ON THE SECURITY MARKETS IN BRICS ECONOMIESRead the article
THE DETERMINANTS OF IMPORT DEMAND IN SOUTH AFRICA: AN EMPIRICAL INVESTIGATIONRead the article
THE IMPACT OF DOMESTIC AND FOREIGN PUBLIC DEBT ON ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM ZIMBABWERead the article
THE GREAT RECESSION AND THE DETERMINANTS OF TARIFF AND ANTIDUMPING RESTRICTIONS IN ARGENTINA, BRAZIL AND MEXICO: A RETROSPECTIVE STUDYRead the article
Pascal Xavier GNAGNE, University of Johannesburg, South Africa
Lumengo BONGA-BONGA, University of Johannesburg, South Africa
This study analyses the impact of exchange rate risk on the security markets, especially the equity market returns and bond yields in the BRICS economies. Moreover, the study explores the extent of volatility spillovers between the foreign exchange, equity and bond markets in the BRICS economies. To reach this objective, a multivariate GARCH-M with BEKK specifications is applied on weekly data obtained from Thomson Reuters DataStream. The findings of the paper show that exchange rate volatility has a positive impact on bond yields in all BRICS countries except in South Africa. In addition, volatility to exchange rate positively influences equity returns in Brazil, India and South Africa, while the influence on Chinese and Russian equity returns is negative. The findings imply that exchange rate risks are not successfully hedged in the equity market in Brazil, India and South Africa. Furthermore, the results of volatility spillovers between the equity returns, bond yields and foreign exchange markets show that volatility shocks are unilaterally transmitted from the security market to the foreign exchange market in South Africa and Russia. The finding implies a possible risk contagion from the security market to the foreign exchange market in the two countries.
C32, F31, G15
Exchange Rate Risks, Security Market, BRICS, BEKK GARCH-M
Adjasi, C., S.K. Harvey and D. Agyapong (2008), “Effect of Exchange Rate Volatility on the Ghana Stock Exchange”, African Journal of Accounting, Economics, Finance and Banking Research, 3(3), 28-47.
Aggarwal, G., A.K. Srivastav, A. Srivastava, (2010), “A Study of Exchange Rates Movement and Stock Market Volatility”, International Journal of Business and Management, 5(12), 62-73.
Aloui, C. (2007), “Price Volatility Spillovers between Exchange Rates and Stock Indexes for the Pre-and Post-Euro Period”, Quantitative Finance, 7(6), 669-685.
Baba, Y., R.F. Engle, D.K. Kraft and K. Kroner (1990), “Multivariate Simultaneous Generalized ARCH”, University of California Unpublished Manuscript.
Bae, K., G.A. Karolyi, and R.M. Stulz (2003), “A New Approach to Measuring Financial Contagion”, The review of Financial Studies, 16(3), 717-763.
Bénassy-Quéré, A., L. Fontagné and A. Lahrèche-Révil (2001), “Exchange Rate Strategies in the Competition for Attracting Foreign Direct Investment”, Journal of the Japanese and International Economies, 15(2), 178-198.
Bhuyan, R., M.G. Robbani, B. Talukdar and A. Jain (2016), “Information Transmission and Dynamics of Stock Price Movements: An Empirical Analysis of BRICS and US Stock Markets”, International Review of Economics & Finance, 46(C), 180-195.
Bollerslev, T., R. Engle and J. Wooldridge (1988), “A Capital Asset Pricing Model with Time-Varying Covariances”, Journal of Political Economy, 96(1), 116-131.
Bonga-Bonga, L. (2013), “Transmission of Volatility Shocks between the equity and Foreign Exchange Markets in South Africa”, The Journal of Applied Business Research, 29(5), 1529-1540.
Bonga-Bonga, L. and J. Hoveni (2013), “Volatility Spillovers between the
Equity Market and Foreign Exchange Market in South Africa in the 1995-2010 Period”, South African Journal of Economics, 81(2), 260-274.
Bonga-Bonga, L. and M. Mwamba (2011), “The Predictability of Stock Market Returns in South Africa: Parametric vs. Non-Parametric Methods”, South African Journal of Economics, 79(3), 301-311.
Caporale, G.M., F.M. Ali and N. Spagnolo (2015), “Exchange Rate Uncertainty and International Portfolio Flows: A Multivariate GARCH-in-Mean Approach”, Journal of International Money and Finance, 54(C), 70-92.
Chkili, W. and D.K. Nguyen (2014), “Exchange Rate Movements and Stock Market Returns in a Regime-Switching Environment: Evidence for BRICS Countries”, IPAG Business School Working Paper No. 388.
Choi, D.F.S., V. Fang and T.Y. Fu (2009), “Volatility Spillovers between New Zealand Stock Market Returns and Exchange Rate Changes before and after the 1997 Asian Financial Crisis”, Asian Journal of Finance & Accounting, 1(2), 107-117.
Dahir, A.M., F. Mahat, N.H. Ab Razak and A.N. Bany-Ariffin (2018), “Revisiting the Dynamic Relationship between Exchange Rates and Stock Prices in BRICS Countries: A Wavelet Analysis”, Borsa Istanbul Review, 18(2), 101-113.
Duncan, A.S. and A. Kabundi (2011), “Volatility Spillovers across South African Asset Classes during Domestic and Foreign Financial Crises”, ERSA Working Paper No. 202.
Engle, R. and K. Kroner (1995), “Multivariate Simultaneous Generalized ARCH”, Econometric Theory, 11(1), 122-150.
Erhmann, M., M. Fratzscher and R. Rigobon (2011), “Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission”, Journal of Applied Econometrics, 26(6), 948-974.
Fang, W. and S.M. Miller (2002), “Currency Depreciation and Korean Stock Market Performance during the Asian Financial Crisis”, University of Connecticut, Department of Economics Working Papers No. 2002-30.
FRBSF (2001), Federal Reserve Bank of San Francisco: San Francisco.
Ffrench-Davis, R. (2003), Financial Crises and National Policy Issues: An Overview, World Institute for Development Economics: UN Eclac.
Fidora, M., M. Fratzscher and C. Thimann (2007), “Home Bias in Global Bond and Equity Markets: The Role of Exchange Rate Volatility”, Journal International Money Finance, 26(4), 631-655.
Goldberg, L. (1993), “Exchange Rate and Investment in United States Industry”, Review of Economics and Statistics, 75(4), 575-588.
Grambovas, C.A. (2003), “Exchange Rate Volatility and Equity Markets: Evidence from the Czech Republic, Greece and Hungary”, Eastern European Economics, 41(5), 24-48.
Griffith-Jones, S. (2003), Capital Flow to Emerging Economies: Does the Emperor Have Clothes?, in: R. Ffrench-Davies, S. Griffith-Jones (Eds), “From Capital Surges to Drought: Seeking Stability for Emerging Economies”, Palgrave : Basingstoke.
Hatemi-J, A. and M. Irandoust (2002), “On the Causality between Exchanges Rates and Stock Prices: A Note”, Bulletin of Economic Research, 54(2), 197-203.
Hussain, H. and V.K. Liew (2004), “Causal Relationships between Exchange Rate and Stock Prices in Malaysia and Thailand during the 1997 Currency Crisis Turmoil”, Available from:
Ibrahim, M. (1999), “Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis”, Asian Economic Journal, 13(2), 219-231.
Jebran, K. and A. Iqbal (2016), “Dynamics of Volatility Spillover between Stock Market and Foreign Exchange Market: Evidence from Asian Countries”, Financial Innovation, 2(3), 1-20.
Kanas, A. (2000), “Volatility Spillovers between Stock Returns and Exchange Rate Changes: International Evidence”, Journal of Business Finance & Accounting, 27(3-4), 448-467.
Karell, V. (2013), “Interdependence of International Stock Markets, European Government Bond Market and Gold Market”, Lappeenranta University of Technology School of Business Discussion Paper.
Karolyi, A. (1995), “A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada”, Journal of Business & Economic Statistics, 13(1), 11-25.
Kim, K. (2003), “Dollar Exchange Rate and Stock Price: Evidence from Multivariate Cointegration and Error Correction Model”, Review of Financial Economics, 12(3), 301-313.
Kumar, S., P. Dublish and M.M. Haque (2016), “Volatility Spillovers between Foreign Exchange Markets of India and China”, Asia-Pacific Journal of Management Research and Innovation, 12(2), 134-144.
Kurihara, Y. (2006), “The Relationship between Exchange Rate and Stock Prices during the Quantitative Easing Policy in Japan”, International Journal of Business, 11(4), 375-386.
Maghrebi, M., M.J. Holmes and E.J. Pentecost (2006), “Are there Asymmetries in the Relationship Between Exchange Rate Fluctuations and Stock Market Volatility in Pacific Basin Countries?”, Review of Pacific Basin Financial Markets and Policies, 9(2), 229-256.
Mishra, A.K., N. Swain and D. Malhotra (2007), “Volatility Spillover between Stock and Foreign Exchange Markets: Indian Evidence”, International Journal of Business, 12(3), 343-359.
Morales, L. (2008), “Volatility Spillovers between Equity and Currency Markets: Evidence from Major Latin American Countries”, Latin American Journal of Economics, 45(132), 185-215.
Muhammad, N. and A. Rasheed (2002), “Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries”, The Pakistan Development Review, 41(4), 535-550.
Najaf, R. and K. Najaf (2016), “A Study of Exchange Rates Movement and Stock Market Volatility”, Asian Journal of Management, Engineering & Computer Sciences, 1(1), 32-38.
Najand, M. and B. Seifert (1992), “Volatility of Exchange Rates, Interest Rates, and Stock Returns”, Journal of Multinational Financial Management, 2(1), 1-19.
Naresh, G., G. Vasudevan, S. Mahalakshmi and S. Thiyagarajan (2018), “Spillover Effect of US Dollar on the Stock Indices of BRICS”, Research in International Business and Finance, 44(C), 359-368.
Nieh, C-C. and C-F. Lee (2001), “Dynamic Relationship between Stock Prices and Exchange Rates for G-7 Countries”, The Quarterly Review of Economics and Finance, 41(4), 477-490.
Odoyo F.S., R. Muasya and K.T. Kenneth (2014), “Effect of Foreign Exchange Rates on Price per Share”, Journal of Business Administration and Education, 6(2), 34-56.
Omorokunwa, O.G. and N. Ikponmwosa (2014), “Exchange Rate Volatility and Foreign Private Investment in Nigeria”, Asian Journal of Business Management, 6(4), 146-154.
Pan, M-S., R.C-W. Fok and Y.A. Liu (2007), “Dynamic Linkages between Exchange Rates and Stock Prices: Evidence from East Asian Markets”, International Review of Economics and Finance, 16(4), 503-520.
Panda, M.R. and J.K. Parida (2013), “A Study on Asset Price Fluctuation and the Impact of Foreign Exchange Rate on Equity Pricing”, International Journal of Applied Business and Economic Research, 11(1), 115-129.
Phylaktis, K. and F. Ravazzolo (2005), “Stock Prices and Exchange Rate Dynamics”, Journal of International Money and Finance, 24(7), 1031-1053.
Sekmen, F. (2011), “Exchange Rate Volatility and Stock Returns for the U.S.”, African Journal of Business Management, 5(22), 9659-9664.
Shah, M.K.A., Z. Hyder and M.K. Pervaiz (2009), “Central Bank Intervention and Exchange Rate Volatility in Pakistan: An Analysis using GARCH-X Model”, Applied Financial Economics, 19(18), 1497-1508.
Sifunjo, A. and E.K. Mwasaru (2012), “The Causal Relationship between Exchange Rates and Stock Prices in Kenya”, Research Journal of Finance and Accounting, 3(7), 121-130.
Stavárek, D. (2005), “Stock Prices and Exchange Rates in the EU and the USA: Evidence of their Mutual Interactions”, Czech Journal of Economics and Finance (Finance a uver), 55(3-4), 141-161.
Stefanescu, R. and R. Dumitriu (2013), “Impact of the Foreign Exchange Rates Fluctuations on Returns and Volatility of the Bucharest Stock Exchange”, Munich Personal RePEc Archive Paper No. 47229.
Tudor, C. and C. Popescu-Dutaa (2012), “On the Causal Relationship between Stock Returns and Exchange Rates Changes for 13 Developed and Emerging Markets”, Procedia - Social and Behavioral Sciences, 57, 275-282.
Urata, S. and H. Kawai (2000), “The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-Sized Enterprises”, Small Business Economics, 15(2), 79-103.
Yang, S-Y. and S-C. Doong (2004), “Price and Volatility Spillovers between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries”, International Journal of Business and Economics, 3(2), 139-153.
Zia, Q.Z. and Z. Rahman (2011), “The Causality between Stock Market and Foreign Exchange Market of Pakistan”, Interdisciplinary Journal of Contemporary Research in Business, 3(5), 906-916.