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

Shoujun Huang, Mariya Gubareva, Tamara Teplova and Ahmed Bossman

Energy Economics, 2024, vol. 136, issue C

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.

Keywords: African currency markets; Geopolitical risk; Crude oil; Quantile-based causality; Quantile regression; Quantile-on-quantile regression; FX returns' predictability (search for similar items in EconPapers)
JEL-codes: F51 F62 G01 G10 N17 N27 Q43 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003876

DOI: 10.1016/j.eneco.2024.107679

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