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African forex markets: Modeling their predictability and the asymmetric effects of oil and geopolitical risk

Author

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  • Huang, Shoujun
  • Gubareva, Mariya
  • Teplova, Tamara
  • Bossman, Ahmed

Abstract

This study investigates the African forex (FX), geopolitical risk (GPR) and oil associations, resorting to the quantile-based causality, parametric quantile regression (QR), and non-parametric quantile-on-quantile regression (QQR) methodologies. We explore 16 major African currency markets. The sample contains daily data and spans from July 2000 through August 2023. Our results zoom on the differences in the FX-GPR-oil interactions at different market conditions of the dependent and independent variables, proxied for each case by 19 quantiles from 0.05 to 0.95. We find that the African FX returns are significantly asymmetrically predicted by both WTI oil and GPR. Our tail-based causality analysis uncovers the directional causal flow from GPR and Oil (WTI) to foreign exchange rates. We also report on salient asymmetries in the responsiveness of country-specific African FX returns to oil and geopolitics-driven shocks. In addition, the results of our QR analysis show a mix of positive and negative GPR and Oil effects, characterized by varying degrees of significance for different currencies. Our QQR analysis also reveals that GPR and WTI oil exert asymmetric effects on African FX returns. The returns of several African forex markets demonstrate negative relationships with GPR, especially at the lower tails of GPR and/or WTI oil, as usually the extreme-tailed conditions are driven by diverse kinds of crises, well covered by the analyzed dataset. Our outcomes cater relevant knowledge for scholars, FX investors, traders and regulatory bodies.

Suggested Citation

  • Huang, Shoujun & Gubareva, Mariya & Teplova, Tamara & Bossman, Ahmed, 2024. "African forex markets: Modeling their predictability and the asymmetric effects of oil and geopolitical risk," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003876
    DOI: 10.1016/j.eneco.2024.107679
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    More about this item

    Keywords

    African currency markets; Geopolitical risk; Crude oil; Quantile-based causality; Quantile regression; Quantile-on-quantile regression; FX returns' predictability;
    All these keywords.

    JEL classification:

    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • N17 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Africa; Oceania
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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