Exchange rate volatility in West African countries: is there a shred of Spillover?

Kalu Onwukwe Emenike

International Journal of Emerging Markets, 2018, vol. 13, issue 6, 1457-1474

Abstract: Purpose - The purpose of this paper is to evaluate selected West African currencies/US dollar exchange rates for the evidence of volatility spillover. Specifically, the paper examines West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD, for any evidence of shock and volatility spillover. Design/methodology/approach - The author employs multivariate GARCH (1,1)–BEKK model which enables the evaluation of the interaction within the volatility of two or more series because of its capability to detect volatility spillover among time series observations, as well as the persistence of volatility within each series. Findings - The major findings of this study are as follows: there is evidence of volatility clustering in West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD. There is evidence of bi-directional shock and volatility spillover between the Nigerian naira and West African CFA franc/USD exchange rates, and uni-directional shock spillover from the Gambian dalasi to the West African CFA franc/USD exchange rates. There is, however, no evidence of exchange rate shock and volatility spillover between Nigerian naira and Gambian dalasi. Originality/value - Although considerable literature exists on the volatility of exchange rate in West Africa and comparative analysis of exchange rates volatility in few countries of West Africa, there is absence of empirical studies on exchange rate volatility spillover among countries in the region. Since containing exchange rate volatility is one of the major objectives of monetary policy, understanding the nature and direction of exchange rate volatility spillover would propel formulation exchange rate policies that would minimise exchange rate uncertainty and entrench sustainable development. In addition, the nature of exchange rate volatility spillover between West African countries would provide basis for international traders and foreign portfolio investors to develop effective strategies for hedging against exchange rate shocks that are propagated across countries by designing appropriate risk management techniques.

Keywords: Exchange rate; West Africa; Volatility spillover; Multivariate GARCH model (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-08-2017-0312

DOI: 10.1108/IJoEM-08-2017-0312

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