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.
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.
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.
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.
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.
The authors are grateful to the Editor, Dr John Jahera and the anonymous referees of the journal for their extremely useful comments and suggestions to improve the quality of the research paper. Usual disclaimers apply. The authors of this article have not made their research dataset openly available. Any enquiries regarding the dataset can be directed to the corresponding author.
Panda, A.K., Nanda, S., Singh, V.K. and Kumar, S. (2019), "Evidence of leverage effects and volatility spillover among exchange rates of selected emerging and growth leading economies", Journal of Financial Economic Policy, Vol. 11 No. 2, pp. 174-192. https://doi.org/10.1108/JFEP-03-2018-0042Download as .RIS
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