Forecasting volatilities of currency exchange rates of emerging market economies

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Abstract

The degree of nation-to-nation interaction brought on by internationalization has sparked concerns over the possibility of shocks crossing boundaries. The paper forecasted the volatility of exchange rates of currencies in Brazil, Russia, India, China, and South Africa (BRICS) using asymmetric models. Based on the findings, the patterns of predicted volatility indicate that BRICS economies face greater currency risk when doing business abroad in the future. Inflation, previous currency exchange rate volatility, and hikes in interest rate differential are some of the factors contributing to the increased volatility. Due to the interconnectedness of volatility shocks, businesses should employ hedging strategies to lower their exposure to currency market risks. The priors of Bayesian vector autoregression (VAR) demonstrate that the response of consumer price inflation to shocks in volatilities of exchange rates of BRICS declines first and thereafter begins to rise persistently over time. Positive shock to interest rates differential causes the consumer price inflation to rise, stabilizing in the eighth quarter. The findings are further validated by the results’ continued robustness under various prior definitions. BRICS need protection against the spillover effect of the volatility in their exchange rates. These findings emphasize the impact of creating monetary policies that help reduce inflationary risks brought on investors by exchange rate swings.

Keywords: Consumer Price Inflation, Bayesian VAR, Exchange Rate Volatility, Foreign Exchange

Authors’ individual contribution: Conceptualization — D.U.; Methodology — D.U., M.A.U., J.N.N., and A.F.A.; Software — D.U., B.I., C.E.O., A.G.B., and F.A.E.; Validation — D.U., B.I., B.O., C.E.I., C.H.D., and M.E.E.; Formal Analysis — D.U., B.I., H.W.M., C.E.B., C.H.D., and F.I.O.; Investigation — D.U., B.O., C.H.D., M.A.U., C.E.O., and H.W.M.; Data Curation — D.U., B.I., and M.A.U.; Writing — D.U., B.I., B.O., J.N.N., C.E.I., C.E.B., and A.F.A.; Supervision — D.U., J.N.N., M.A.U., and B.I.

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

JEL Classification: C19, G30, C50

Received: 17.08.2024
Revised: 04.08.2024; 07.02.2025; 03.06.2025
Accepted: 08.07.2025
Published online: 10.07.2025

How to cite this paper: Umoru, D., Ugbaka, M. A., Igbinovia, B., Atseye, A. F., Ojikpong, C. E., Bullem, A. G., Eke, F. A., Ihuoma, C. E., Odegha, B., Essien, M. E., Ndome, J. N., Bassey, C. E., Odey, F. I., Mboto, H. W., & Dede, C. H. (2025). Forecasting volatilities of currency exchange rates of emerging market economies. Risk Governance & Control: Financial Markets & Institutions, 15(3), 49–63. https://doi.org/10.22495/rgcv15i3p4