IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/84773.html
   My bibliography  Save this paper

The impact of exchange rate volatility on capital flows in BRICS economies

Author

Listed:
  • Bonga-Bonga, Lumengo
  • Gnagne, Pascal Xavier

Abstract

This study intends to analyse the impact of exchange rate risk on equity returns and bond yields as well as the volatility spillover 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 ten-year bond yields in all BRICS countries except in South Africa, where the volatility of exchange rate has a negative impact. 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. These findings show that equity returns increase with the increase in exchange rate volatility in Brazil, India and South Africa, and decrease in China and Russia. Furthermore, the results on volatility spillovers between the equity returns, bond yields and foreign exchange markets show that the transmissions are from capital markets to foreign exchange market in South Africa, while the volatility to currency markets influence capital markets in Russia. The results of the study give evidence of bidirectional volatility transmissions in Brazil and China. Surprisingly, in India, volatility is transmitted from foreign exchange markets to bond markets, while changes to equity influence the foreign exchange markets.

Suggested Citation

  • Bonga-Bonga, Lumengo & Gnagne, Pascal Xavier, 2017. "The impact of exchange rate volatility on capital flows in BRICS economies," MPRA Paper 84773, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:84773
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/84773/1/MPRA_paper_84773.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Chkili, Walid & Nguyen, Duc Khuong, 2014. "Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 31(C), pages 46-56.
    3. Muhammad Kashif Ali Shah & Zulfiqar Hyder & Muhammad Khalid Pervaiz, 2009. "Central bank intervention and exchange rate volatility in Pakistan: an analysis using GARCH-X model," Applied Financial Economics, Taylor & Francis Journals, vol. 19(18), pages 1497-1508.
    4. Nabil Maghrebi & Mark J. Holmes & Eric 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 (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 229-256.
    5. Michael Ehrmann & Marcel Fratzscher & Roberto Rigobon, 2011. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 948-974, September.
    6. Griffith-Jones, Stephany, 2003. "Capital flows to emerging economies: does the emperor have clothes?," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1784.
    7. Vassalou, Maria, 2000. "Exchange Rate And Foreign Inflation Risk Premiums In Global Equity Returns," CEPR Discussion Papers 2448, C.E.P.R. Discussion Papers.
    8. Fiona Tregenna & Kabeya C. Mulamba, 2019. "Spatial dependence of per capita property tax income in South Africa," Working Papers 202, Economic Research Southern Africa.
    9. Shujiro Urata & Hiroki Kawai, 2000. "The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-sized Enterprises (in Japanese)," Economic Analysis, Economic and Social Research Institute (ESRI), vol. 158, pages 3-21, January.
    10. Lumengo Bonga‐Bonga & Muteba Mwamba, 2011. "The Predictability Of Stock Market Returns In South Africa: Parametric Vs. Non‐Parametric Methods," South African Journal of Economics, Economic Society of South Africa, vol. 79(3), pages 301-311, September.
    11. Angelos Kanas, 2000. "Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3‐4), pages 447-467, April.
    12. Lumengo Bonga-Bonga & Jamela 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, Economic Society of South Africa, vol. 81(2), pages 260-274, June.
    13. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 363-376, September.
    14. Hatemi-J, Abdulnasser & Irandoust, Manuchehr, 2002. "On the Causality between Exchange Rates and Stock Prices: A Note," Bulletin of Economic Research, Wiley Blackwell, vol. 54(2), pages 197-203, April.
    15. Lucía de las Nieves Morales, 2008. "Volatility Spillovers between Equity and Currency Markets: Evidence from Major Latin American Countries," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 185-215.
    16. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
    17. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    18. Jamela Hoveni & Lumengo Bonga-Bonga, 2011. "Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa," Working Papers 252, Economic Research Southern Africa.
    19. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    20. Karolyi, G Andrew, 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, American Statistical Association, vol. 13(1), pages 11-25, January.
    21. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313.
    22. Khalil Jebran & Amjad Iqbal, 2016. "Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-20, December.
    23. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    24. Urata, Shujiro & Kawai, Hiroki, 2000. "The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-Sized Enterprises," Small Business Economics, Springer, vol. 15(2), pages 79-103, September.
    25. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-588, November.
    26. Stefanescu, Razvan & Dumitriu, Ramona, 2013. "Impact of the foreign exchange rates fluctuations on returns and volatility of the Bucharest Stock Exchange," MPRA Paper 47229, University Library of Munich, Germany, revised 04 Apr 2013.
    27. Vassalou, Maria, 2000. "Exchange rate and foreign inflation risk premiums in global equity returns," Journal of International Money and Finance, Elsevier, vol. 19(3), pages 433-470, June.
    28. WenShwo Fang & Stephen M. Miller, 2002. "Currency Depreciation and Korean Stock Market Performance during the Asian Financial Crisis," Working papers 2002-30, University of Connecticut, Department of Economics.
    29. Chaker Aloui, 2007. "Price and volatility spillovers between exchange rates and stock indexes for the pre- and post-euro period," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 669-685.
    30. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Nicola, 2015. "Exchange rate uncertainty and international portfolio flows: A multivariate GARCH-in-mean approach," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 70-92.
    31. Sheng-Yung Yang & Shuh-Chyi 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, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 3(2), pages 139-153, August.
    32. Pan, Ming-Shiun & Fok, Robert Chi-Wing & Liu, Y. Angela, 2007. "Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 503-520.
    33. Naeem Muhammad & Abdul Rasheed, 2002. "Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 535-550.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dharmendra Singh & M. Theivanayaki & M. Ganeshwari, 2024. "Examining Volatility Spillover Between Foreign Exchange Markets and Stock Markets of Countries such as BRICS Countries," Global Business Review, International Management Institute, vol. 25(5), pages 1269-1289, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gnagne, Pascal Xavier & Bonga-Bonga, Lumengo, 2020. "The Impact of Exchange Rate Volatility on the Security Markets in BRICS Economies," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 73(1), pages 21-50.
    2. Tian, Maoxi & El Khoury, Rim & Alshater, Muneer M., 2023. "The nonlinear and negative tail dependence and risk spillovers between foreign exchange and stock markets in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    3. Stefanescu, Razvan & Dumitriu, Ramona, 2013. "Impact of the foreign exchange rates fluctuations on returns and volatility of the Bucharest Stock Exchange," MPRA Paper 47229, University Library of Munich, Germany, revised 04 Apr 2013.
    4. Xie, Zixiong & Chen, Shyh-Wei & Wu, An-Chi, 2020. "The foreign exchange and stock market nexus: New international evidence," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 240-266.
    5. Ngo Thai Hung, 2022. "Spillover Effects Between Stock Prices and Exchange Rates for the Central and Eastern European Countries," Global Business Review, International Management Institute, vol. 23(2), pages 259-286, April.
    6. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, vol. 12(3), pages 272-292, September.
    7. Jamela Hoveni & Lumengo Bonga-Bonga, 2011. "Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa," Working Papers 252, Economic Research Southern Africa.
    8. Andreou, Elena & Matsi, Maria & Savvides, Andreas, 2013. "Stock and foreign exchange market linkages in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 248-268.
    9. Tian Yong Fu & Mark J. Holmes & Daniel F.S. Choi, 2011. "Volatility transmission and asymmetric linkages between the stock and foreign exchange markets," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(1), pages 36-50, March.
    10. Dharmendra Singh & M. Theivanayaki & M. Ganeshwari, 2024. "Examining Volatility Spillover Between Foreign Exchange Markets and Stock Markets of Countries such as BRICS Countries," Global Business Review, International Management Institute, vol. 25(5), pages 1269-1289, October.
    11. Chkili, Walid & Nguyen, Duc Khuong, 2014. "Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries," Research in International Business and Finance, Elsevier, vol. 31(C), pages 46-56.
    12. Malik, Farooq, 2021. "Volatility spillover between exchange rate and stock returns under volatility shifts," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 605-613.
    13. Tshikalange, Mulanga & Bonga-Bonga, Lumengo, 2023. "The determinants of the dynamic correlation between foreign exchange and equity markets: Cross-Country comparisons," MPRA Paper 118401, University Library of Munich, Germany.
    14. Lumengo Bonga-Bonga & Jamela 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, Economic Society of South Africa, vol. 81(2), pages 260-274, June.
    15. Christos Kollias & Stephanos Papadamou & Costas Siriopoulos, 2016. "Stock markets and effective exchange rates in European countries: threshold cointegration findings," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(2), pages 215-274, August.
    16. Kuchin I.I., 2016. "Exchange rate risk exposure in asset pricing theory," World of economics and management / Vestnik NSU. Series: Social and Economics Sciences, Socionet, vol. 16(3), pages 31-41.
    17. Maud Korley & Evangelos Giouvris, 2021. "The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa," JRFM, MDPI, vol. 14(3), pages 1-30, March.
    18. Agya Atabani Adi, 2017. "Returns Effect, Shocks and Volatility Transmission between Foreign Exchange-Stock Markets in Nigeria," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(1), pages 29-38, March.
    19. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    20. Lateef O. Akanni & Kazeem Isah, 2018. "Exchange Rate Movements on Sectoral Stock Prices of Nigerian Firms: Is there Evidence of Asymmetry?," Working Papers 046, Centre for Econometric and Allied Research, University of Ibadan.

    More about this item

    Keywords

    Exchange rate volatility; multivariate GARCH; BRICS;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:84773. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.