Impact of uncertainty on foreign exchange market stability: based on the LT-TVP-VAR model

Jingshan Liu

China Finance Review International, 2020, vol. 11, issue 1, 53-72

Abstract: Purpose - The purpose of this study is to investigate the effects of uncertainty, namely, macroeconomic uncertainty (MU) and financial uncertainty (FU) on foreign exchange market stability, specifically on foreign exchange market pressure (EMP) and jump risk (RJV). Design/methodology/approach - The latent threshold time-varying parameter VAR (LT-TVP-VAR) econometric approach is used in estimations to solve structural breaks. Findings - The relationship of uncertainties and China's foreign exchange market stability is latent threshold nonlinear dynamic time-varying. In China's renminbi (RMB) appreciation stage, both MU and FU weaken the appreciation pressure of RMB. Moreover, MU and FU significantly increase the RJV, while MU significantly affects the RJV of the foreign exchange market. In the RMB depreciation stage, both MU and FU strengthen the EMP. Research limitations/implications - Findings based on data in China's foreign exchange market can be considered for other global markets in future research. Practical implications - An increase in MU and FU has a negative effect on foreign exchange stability. Regulators can prevent the economic system uncertainty shocks on foreign exchange market stability through observation and judgment of MU and FU, which helps prevent and relieve financial risks. Investors can reduce foreign exchange risk as the exchange rate rebounds after hedging behavior during high uncertainty periods. Originality/value - The effect of MU on the foreign exchange market stability is greater than that of FU, regardless of whether EMP or RJV occurs in the foreign exchange market.

Keywords: Macroeconomic uncertainty; Financial uncertainty; Foreign exchange market stability; Foreign exchange market pressure; Jump risk (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-07-2019-0112

DOI: 10.1108/CFRI-07-2019-0112

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