The Impact of Exchange Rate Volatility on the Security Markets in BRICS Economies

Pascal Xavier Gnagne and Lumengo Bonga-Bonga
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Pascal Xavier Gnagne: University of Johannesburg, South Africa

Economia Internazionale / International Economics, 2020, vol. 73, issue 1, 21-50

Abstract: This study analyses the impact of exchange rate risk on the security markets, especially the equity market returns and bond yields in the BRICS economies. Moreover, the study explores the extent of volatility spillovers between the foreign exchange, equity and bond markets in the BRICS economies. To reach this objective, a multivariate GARCH-M with BEKK specifications is applied on weekly data obtained from Thomson Reuters DataStream. The findings of the paper show that exchange rate volatility has a positive impact on bond yields in all BRICS countries except in South Africa. In addition, volatility to exchange rate positively influences equity returns in Brazil, India and South Africa, while the influence on Chinese and Russian equity returns is negative. The findings imply that exchange rate risks are not successfully hedged in the equity market in Brazil, India and South Africa. Furthermore, the results of volatility spillovers between the equity returns, bond yields and foreign exchange markets show that volatility shocks are unilaterally transmitted from the security market to the foreign exchange market in South Africa and Russia. The finding implies a possible risk contagion from the security market to the foreign exchange market in the two countries. L’impatto della volatilità del tasso di cambio sui mercati mobiliari dei paesi BRICS Questo studio analizza l’impatto del rischio del tasso di cambio sui mercati mobiliari, specialmente sui rendimenti azionari e obbligazionari, nelle economie dei paesi BRICS.I risultati evidenziano che la volatilità del tasso di cambio ha un impatto positivo sul rendimento delle obbligazioni in tutti i paesi BRICS eccetto il Sud Africa. Questo risultato dimostra che i rischi del tasso di cambio non sono adeguatamente coperti nei mercati azionari di Brasile, India e Sud Africa. Le evidenze di ricaduta della volatilità sui rendimenti sia del mercato azionario che dei cambi dimostrano anche che in Sud Africa e in Russia questi shock sono trasmessi unilateralmente dal mercato azionario al mercato dei cambi esteri, il che implica la possibilità del rischio di contagio dal mercato azionario a quello dei cambi in entrambi i paesi.

Keywords: Exchange Rate Risks; Security Market; BRICS; BEKK GARCH-M (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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