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Asymmetric effect of exchange rate volatility on trade in sub-Saharan African countries

Asymmetric effect of exchange rate volatility on trade in sub-Saharan African countries The purpose of this study is to examine the effect of asymmetric structure inherent in exchange rate volatility on trade in sub-Saharan African countries from 2005 to 2017.Design/methodology/approach17 countries in sub-Saharan African Countries are used for the study. Exchange rate volatility is generated using generalised autoregressive conditional heteroscedacity (1,1), while the asymmetric components of exchange rate volatility are generated using a refined approach of cumulative partial sum developed by Granger and Yoon (2002). Two-step generalised method of moments is used as the estimation technique in order to address the problem of endogeneity, commonly found in panel data.FindingsThe result from the study shows the evidence of exchange rate volatility clustering which is strictly persistent in sub-Saharan African countries. The asymmetric components (positive and negative shocks) of exchange rate volatility have negative and significant effect on trade in the region. Meanwhile, the effect of negative exchange rate volatility is higher on trade when compared with the positive exchange rate volatility. Furthermore, real exchange rate has negative and significant effect on trade in sub-Saharan African countries.Research limitations/implicationsThe outcomes of this study are important for participants in foreign exchange market. As investors in foreign exchange market react more to the negative news than positive news, investors need to diversify their risk. Also, regulators in the market need to formulate appropriate macroeconomic policies that will stabilize exchange rate in the region.Originality/valueThis study deviates from extant studies in the literature by incorporating asymmetric structure into the exchange rate trade nexus using a refined approach. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Asymmetric effect of exchange rate volatility on trade in sub-Saharan African countries

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1026-4116
DOI
10.1108/jeas-09-2019-0101
Publisher site
See Article on Publisher Site

Abstract

The purpose of this study is to examine the effect of asymmetric structure inherent in exchange rate volatility on trade in sub-Saharan African countries from 2005 to 2017.Design/methodology/approach17 countries in sub-Saharan African Countries are used for the study. Exchange rate volatility is generated using generalised autoregressive conditional heteroscedacity (1,1), while the asymmetric components of exchange rate volatility are generated using a refined approach of cumulative partial sum developed by Granger and Yoon (2002). Two-step generalised method of moments is used as the estimation technique in order to address the problem of endogeneity, commonly found in panel data.FindingsThe result from the study shows the evidence of exchange rate volatility clustering which is strictly persistent in sub-Saharan African countries. The asymmetric components (positive and negative shocks) of exchange rate volatility have negative and significant effect on trade in the region. Meanwhile, the effect of negative exchange rate volatility is higher on trade when compared with the positive exchange rate volatility. Furthermore, real exchange rate has negative and significant effect on trade in sub-Saharan African countries.Research limitations/implicationsThe outcomes of this study are important for participants in foreign exchange market. As investors in foreign exchange market react more to the negative news than positive news, investors need to diversify their risk. Also, regulators in the market need to formulate appropriate macroeconomic policies that will stabilize exchange rate in the region.Originality/valueThis study deviates from extant studies in the literature by incorporating asymmetric structure into the exchange rate trade nexus using a refined approach.

Journal

Journal of Economic and Administrative SciencesEmerald Publishing

Published: Apr 29, 2021

Keywords: Real exchange rate; Exchange rate volatility; Trade; Asymmetric; Sub-Saharan African countries; GARCH (1,1); GMM; Cumulative partial sum; F14; F31

References