The impact of exchange rate volatility on capital flows in BRICS economies

Bonga-Bonga, Lumengo and Gnagne, Pascal Xavier (2017): The impact of exchange rate volatility on capital flows in BRICS economies.

Abstract

This study intends to analyse the impact of exchange rate risk on equity returns and bond yields as well as the volatility spillover 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 ten-year bond yields in all BRICS countries except in South Africa, where the volatility of exchange rate has a negative impact. 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. These findings show that equity returns increase with the increase in exchange rate volatility in Brazil, India and South Africa, and decrease in China and Russia. Furthermore, the results on volatility spillovers between the equity returns, bond yields and foreign exchange markets show that the transmissions are from capital markets to foreign exchange market in South Africa, while the volatility to currency markets influence capital markets in Russia. The results of the study give evidence of bidirectional volatility transmissions in Brazil and China. Surprisingly, in India, volatility is transmitted from foreign exchange markets to bond markets, while changes to equity influence the foreign exchange markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate volatility, multivariate GARCH, BRICS
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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