Exchange rate volatility transmission in emerging markets

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Abstract

Exchange rate volatility, or a continuous fluctuation in the currency rate has been a major concern in recent years due to its impact on economic activities. No wonder concerns have been raised regarding the connection between exchange rate fluctuations and their effects on the overall economy. The motivation for the study is based on the fact that most emerging economies experiencing inflationary tendencies are more likely to experience a high degree of exchange rate volatility persistence. Such a scenario seems catastrophic to developing economies where large currency movement are more frequent. BEKK-GARCH and DCC-GARCH models were utilized to estimate volatility transmission and persistence respectively in selected African countries. Results show there is presence of spill-over effect in exchange rates of all countries. BEKK-GARCH estimates show that negative effects of exchange rate of one country had deleterious effect on exchange rate of another. We found evidence in favour of bidirectional exchange rate volatility transmission amongst all exchange rates of countries in the study. Dynamic conditional correlation (DCC) model estimates further revealed Ghanaian cedi top list of countries exchange rate volatility persistence followed by naira with a value of 1.0974. Efficient structural transformation is needed to mitigate structural problems that generate inflation in these countries.

Keywords: Emerging African Countries, BEKK-GARCH Model, DCC-GARCH Model, Exchange Rate, Volatility Pass-Through, Persistence

Authors’ individual contribution: Conceptualisation — D.U.; Methodology — D.U., S.E.E., S.S.U., Dav.I., and B.O.A.; Software — D.U., S.E.E., and Dav.I.; Validation — S.E.E., E.O., Dan.I., G.O., and B.O.A.; Formal Analysis — D.U., S.E.E., S.S.U., E.O., and Dan.I.; Investigation — D.U., Dan.I., and B.O.A.; Data Curation — D.U., S.S.U., E.O., G.O., and Dav.I.; Writing — D.U., S.S.U., E.O., Dan.I., and G.O.; Supervision — D.U., S.E.E., E.O., Dan.I., G.O., and B.O.A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: F37, E52, F45

Received: 21.09.2022
Accepted: 20.03.2023
Published online: 22.03.2023

How to cite this paper: Umoru, D., Effiong, S. E., Umar, S. S., Okpara, E., Iyaji, D., Oyegun, G., Iyayi, D., & Abere, B. O. (2023). Exchange rate volatility transmission in emerging markets. Corporate & Business Strategy Review, 4(2), 37–47. https://doi.org/10.22495/cbsrv4i2art4