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Corresponding Author:
Pascal Xavier Gnagne, University of Johannesburg, South Africa

Coauthors:
Lumengo Bonga-Bonga, University of Johannesburg, South Africa

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

Volume 73 - Issue 1, February 2020
(pp. 21-50)
JEL classification: C32, F31, G15
Keywords: Exchange Rate Risks, Security Market, BRICS, BEKK GARCH-M

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.

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

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Institute for International Economics of the Genoa Chamber of Commerce

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