Evidence of leverage effects and volatility spillover among exchange rates of selected emerging and growth leading economies

Ajaya Kumar Panda, Swagatika Nanda, Vipul Kumar Singh and Satish Kumar

Journal of Financial Economic Policy, 2018, vol. 11, issue 2, 174-192

Abstract: Purpose - The purpose of this study is to examine the evidences of leverage effects on the conditional volatility of exchange rates because of asymmetric innovations and its spillover effects among the exchange rates of selected emerging and growth-leading economies. Design/methodology/approach - The empirical analysis uses the sign bias test and asymmetric generalized autoregressive conditional heteroskedasticity (GARCH) models to capture the leverage effects on conditional volatility of exchange rates and also uses multivariate GARCH (MGARCH) model to address volatility spillovers among the studied exchange rates. Findings - The study finds substantial impact of asymmetric innovations (news) on the conditional volatility of exchange rates, where Russian Ruble is showing significant leverage effect followed by Indian Rupee. The exchange rates depict significant mean spillover effects, where Rupee, Peso and Ruble are strongly connected; Real, Rupiah and Lira are moderately connected; and Yuan is the least connected exchange rate within the sample. The study also finds the assimilation of information in foreign exchanges and increased spillover effects in the post 2008 periods. Practical implications - The results probably have the implications for international investment and asset management. Portfolio managers could use this research to optimize their international portfolio. Policymakers such as central banks may find the study useful to monitor and design interventions strategies in foreign exchange markets keeping an eye on the nature of movements among these exchange rates. Originality/value - This is one of the few empirical research studies that aim to explore the leverage effects on exchange rates and their volatility spillovers among seven emerging and growth-leading economies using advanced econometric methodologies.

Keywords: International finance; Econometric modeling; Econometric and statistical methods (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-03-2018-0042

DOI: 10.1108/JFEP-03-2018-0042

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