Title: Sign asymmetry and exchange rate market volatility: empirical evidence from two developing countries
Author: Kwame Osei-Assibey
Address: South Africa Campus School of Business and Economics, Monash University, P/Bag X60 Roodepoort 1725, 144 Peter Road Ruimsig, South Africa
Abstract: Volatility in financial markets is asymmetric in nature with leverage effect a widely accepted market phenomenon. This paper uses exchange rate series from Ghana and Tanzania to empirically show and argue that the foreign exchange market is a 'special case' of the financial market family; for the period considered, exponential generalised autoregressive conditional heteroscedasticity estimates of daily volatility showed that currency appreciation in the Tanzanian market induces a higher volatility compared to a depreciation of the same magnitude, the opposite holds in the Ghanaian market. Vectorauto regression estimations show that feedback effects (the widely accepted explanation to asymmetry in volatility) exist between asymmetric shocks and volatility that ensues for both countries. The bidirectional Granger Causal relationships between exchange rate changes and the volatility that ensues together with the estimated impulse response functions offer further insight on how both countries 'exchange rate markets asymmetrically respond to shocks of either sign.
Keywords: volatility asymmetry; feedback effects; EGARCH; exponential generalised ARCH; VAR; vector auto regression; flexible exchange rates; market volatility; developing countries; Ghana; Tanzania.
Int. J. of Monetary Economics and Finance, 2014 Vol.7, No.2, pp.107 - 121
Submission date: 21 Feb 2014
Date of acceptance: 14 May 2014
Available online: 12 Oct 2014