Return and Volatility Connectedness in Foreign Exchange Markets of Sierra Leone

Johnson, Leroy and Osabuohien, Evans (2023): Return and Volatility Connectedness in Foreign Exchange Markets of Sierra Leone.

Abstract

The study explores the return and volatility nexus in Sierra Leone Foreign Exchange (Forex) Markets. The exchange rate excessive volatilities have been a serious concern as it translates to propel inflationary pressures and erodes the strength of the currency. The methodology of Diebold and Yilmaz (2012, 2014) indicator of connectedness was employed to unravel the intensity of connectedness among the selected forex markets in Sierra Leone (January 2011- December 2021). The study then uses, Leone/USD, Le/ Euro and Le/Pound sterling official exchange rate from the central bank to measure exchange rate dynamics in the market. The study finds connectedness among the forex markets in Sierra Leone to be highly time-varying and appear to be higher during the period of high depreciation of the Leone which coincides with the period of falling iron-ore and oil prices and domestic economic meltdown of 2014 and 2016, respectively. This shows that, relative to external shocks, connectedness among financial markets is likely to get amplified during the time of domestic turbulence. The paper, therefore portends the build-up of reserves by the Central Bank of Sierra Leone which serves as buffers to contain and assuage internal and external shocks in a timely and efficient manner.

• Item Type: MPRA Paper
• Language: English
• Keywords: Connectedness, Foreign Exchange, Return Spillover, Volatility
• Subjects: G - Financial Economics > G1 - General Financial Markets > G10 - General

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