Covid-19 Pandemic and Volatility Spillover Effects on Foreign Exchange Rates

Authors

  •   Silky Vigg Kushwah Professor (Corresponding Author), Department of Finance, New Delhi Institute of Management, 50 (B & C), Mehrauli - Badarpur Road, Behind Batra Hospital, Tughlakabad Institutional Area, New Delhi - 110 062
  •   Pushpa Negi Associate Professor, Department of Finance, New Delhi Institute of Management, 50 (B & C), Mehrauli - Badarpur Road, Behind Batra Hospital, Tughlakabad Institutional Area, New Delhi - 110 062

DOI:

https://doi.org/10.17010/ijf/2024/v18i6/173966

Keywords:

volatility spillover

, foreign exchange rates, emerging economies, GARCH.

JEL Classification Code

, G2, G5, G6

Paper Submission Date

, August 5, 2023, Paper sent back for Revision, March 15, 2024, Paper Acceptance Date, April 23, Paper Published Online, June 15, 2024

Abstract

Purpose : The study aimed to examine the impact of COVID-19 on exchange rate volatility in five major emerging economies: the Indian rupee, Brazilian real, Mexican peso, Chinese yuan, and South African rand. Advanced statistical analysis techniques, including the GARCH (1,1) model and asymmetric volatility models, were employed to uncover significant insights.

Design/Methodology/Approach : The influence of unfavorable COVID-19 news on exchange rate volatility in the five key emerging nations described above was examined using sophisticated statistical analytic approaches, such as the GARCH (1,1) model and asymmetric volatility models.

Findings : The study found that past-day volatility greatly impacted current-day volatility, supporting the existence of the ARCH effect. Surprisingly, external independent variables—LBR, LCY, LMP, and LSR—demonstrated no significant impact on the volatility of LIR, highlighting susceptibility to internal shocks. The results of further using asymmetric volatility models to evaluate long-term consequences indicated that COVID-19 did not affect these variables. Exchange rate returns were not volatile even in the face of bad pandemic-related news.

Practical Implications : The study enhanced the body of knowledge on COVID-19’s effects on currency exchange rates while offering managers and marketers useful advice on navigating currency volatility.

Originality : In contrast to other research, this study contributed to the body of knowledge by examining the effects of COVID-19 on exchange rate volatility within important emerging markets using advanced statistical approaches. It sheds light on the intricate dynamics of currency changes during crises, providing new insights that are beneficial to scholars and experts in the field of international finance.

Downloads

Download data is not yet available.

Downloads

Published

2024-06-15

How to Cite

Kushwah, S. V., & Negi, P. (2024). Covid-19 Pandemic and Volatility Spillover Effects on Foreign Exchange Rates. Indian Journal of Finance, 18(6), 08–25. https://doi.org/10.17010/ijf/2024/v18i6/173966

Issue

Volume 18, Issue 6, June 2024

Section

Articles
Crossref
Scopus
Google Scholar
Europe PMC

References

Akhtaruzzaman, M., Abdel-Qader, W., Hammami, H., & Shams, S. (2021). Is China a source of financial contagion? Finance Research Letters, 38, 101393. https://doi.org/10.1016/j.frl.2019.101393

Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., & Alhammadi, S. (2020). Death and contagious infectious diseases: Impact of COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326. https://doi.org/10.1016/j.jbef.2020.100326

Barua, S. (2020). Understanding coronanomics: The economic implications of the Coronavirus (COVID-19) pandemic. Available at SSRN. https://doi.org/10.2139/ssrn.3566477

Bekaert, G., & Harvey, C. R. (1995). Time-varying world market integration. The Journal of Finance, 50(2), 403–444. https://doi.org/10.1111/j.1540-6261.1995.tb04790.x

Benzid, L., & Chebbi, K. (2020). The impact of COVID-19 on exchange rate volatility: Evidence through GARCH model. Available at SSRN. https://doi.org/10.2139/ssrn.3612141

Ceylan, R. F., Ozkan, B., & Mulazimogullari, E. (2020). Historical evidence for economic effects of COVID-19. The European Journal of Health Economics, 21(6), 817–823. https://doi.org/10.1007/s10198-020-01206-8

Corbet, S., Hou, Y., Hu, Y., Oxley, L., & Xu, D. (2021). Pandemic-related financial market volatility spillovers: Evidence from the Chinese COVID-19 epicentre. International Review of Economics & Finance, 71, 55–81. https://doi.org/10.1016/j.iref.2020.06.022

De Vito, A., & Gomez, J.-P. (2020). Estimating the COVID-19 cash crunch: Global evidence and policy. Available at SSRN. https://doi.org/10.2139/ssrn.3560612

Dikshita, & Singh, H. (2019). Estimating and forecasting volatility using ARIMA model: A study on NSE, India. Indian Journal of Finance, 13(5), 37–51. https://doi.org/10.17010/ijf/2019/v13i5/144184

Dineri, E., & Çütçü, İ. (2020). The COVID-19 process and the exchange rate relation: An application on Turkey. Research Square. https://doi.org/10.21203/rs.3.rs-49026/v1

Feng, G.-F., & Yang, H.-C., Gong, Q., & Chang, C.-P. (2021). What is the exchange rate volatility response to COVID-19 and government interventions? Economic Analysis and Policy, 69, 705–719. https://doi.org/10.1016/j.eap.2021.01.018

Garg, B., & Prabheesh, K. P. (2021). The nexus between the exchange rates and interest rates: Evidence from BRIICS economies during the COVID-19 pandemic. Studies in Economics and Finance, 38(2), 469–486. https://doi.org/10.1108/SEF-09-2020-0387

Hofmann, B., Shim, I., & Shin, H. S. (2021). Emerging market economy exchange rates and local currency bond markets amid the COVID-19 pandemic. Available at SSRN. https://doi.org/10.2139/ssrn.3761875

Huynh, C. M. (2021). Foreign direct investment and income inequality: Does institutional quality matter? The Journal of International Trade & Economic Development, 30(8), 1231–1243. https://doi.org/10.1080/09638199.2021.1942164

ILO & OECD (Organisation for Economic Co-operation and Development). (2020). The impact of the COVID-19 pandemic on jobs and incomes in G20 economies (3rd Employment Working Group Meeting). https://www.ilo.org/publications/impact-covid-19-pandemic-jobsand-incomes-g20-economies-0

Iyke, B. N. (2020). The disease outbreak channel of exchange rate return predictability: Evidence from COVID-19. Emerging Markets Finance and Trade, 56(10), 2277–2297. https://doi.org/10.1080/1540496X.2020.1784718

Joshi, H. (2022). Asset correlation and the optimal portfolio size determination – Case of Nifty 50 and NASDAQ 100 indices. Indian Journal of Research in Capital Markets, 9(1), 8–17. https://doi.org/10.17010/ijrcm/2022/v9i1/170400

Kushwah, S. V., & Garg, M. (2020). The determinants of foreign direct investment: A VECM approach. International Journal of Accounting and Business Finance, 6(2), 55–70. https://doi.org/10.4038/ijabf.v6i2.71

Kushwah, S. V., & Negi, P. (2023). Impact of Covid-19 on the stock performance: A study of oil and gas companies listed on National Stock Exchange. The Journal of Indian Management and Strategy, 28(4), 28–38.

Kushwah, S. V., & Vigg, C. A. (2023). The effect of credit rating announcements on stock returns of banks in India. Afro-Asian Journal of Finance and Accounting, 13(1), 41–53. https://doi.org/10.1504/AAJFA.2023.128619

Kushwah, S. V., Siddiqui, A. A., & Singh, P. (2022). Dynamics of financial development, innovation, trade, and economic growth: Evidence from developed and developing nations. International Journal of Accounting and Business Finance, 8(1), 102–122. https://doi.org/10.4038/ijabf.v8i1.121

Lal, M., Kumar, S., Pandey, D. K., Rai, V. K., & Lim, W. M. (2023). Exchange rate volatility and international trade. Journal of Business Research, 167, 114156. https://doi.org/10.1016/j.jbusres.2023.114156

Li, C., Su, Z.-W., Yaqoob, T., & Sajid, Y. (2021). COVID-19 and currency market: A comparative analysis of exchange rate movement in China and USA during pandemic. Economic Research, 35(1), 2477–2492. https://doi.org/10.1080/1331677X.2021.1959368

Luckieta, M., & Alamsyah, D. P. (2020). The COVID-19 versus exchange rates. Journal of Critical Reviews, 7(19), 9391–9394. https://doi.org/10.31838/jcr.07.19.1048

Lütkepohl, H., & Xu, F. (2012). The role of the log transformation in forecasting economic variables. Empirical Economics, 42, 619–638. https://doi.org/10.1007/s00181-010-0440-1

Marin, E., & Corsetti, G. (2020, April 3). The dollar and international capital flows in the COVID-19 crisis. VOXEU. https://voxeu.org/article/covid-19-crisis-dollar-and-capital-flows

Masih, R., & Masih, A. M. (2001). Long and short term dynamic causal transmission amongst international stock markets. Journal of International Money and Finance, 20(4), 563–587. https://doi.org/10.1016/S0261-5606(01)00012-2

Morina, F., Hysa, E., Ergün, U., Panait, M., & Voica, M. C. (2020). The effect of exchange rate volatility on economic growth: Case of the CEE countries. Journal of Risk and Financial Management, 13(8), 177. https://doi.org/10.3390/jrfm13080177

Muthukamu, M., Amutha, S., & Amudha, R. (2024). Exploring the asymmetric price behavior of health care and pharma sector stocks of NSE in the pandemic period. Indian Journal of Finance, 18(1), 57–71. https://doi.org/10.17010/ijf/2024/v18i1/171878

Nathani, N., & Kushwah, S. V. (2022). Volatility study in some of the emerging stock markets: A GARCH approach. World Review of Science, Technology and Sustainable Development, 18(3–4), 364–378. https://doi.org/10.1504/WRSTSD.2022.123781

Negi, P., Chakraborty, A., & Mathur, G. (2011). Long-term price linkages between the equity markets and oil prices: A study of two big oil consuming countries of Asia. Middle Eastern Finance and Economics, 14, 140–151.

Negi, P., Sankpal, S., & Mathur, G. (2012). Financial market integration and financial crises: The case of big emerging market (BEM) economies. International Journal of Economics and Business Research, 4(6), 622–638. https://doi.org/10.1504/IJEBR.2012.049530

Negi, P., Sharma, S., & Sankpal, S. (2010). Determinants of capital structure decisions: A study of Indian cement industry. Key Drives of Organizational Excellence, 65–74.

Raksong, S., & Sombatthira, B. (2021). Econometric analysis of the determinants of real effective exchange rate in the emerging ASEAN countries. The Journal of Asian Finance, Economics and Business, 8(3), 731–740. https://doi.org/10.13106/jafeb.2021.vol8.no3.0731

Riyazahmed, K., & Sriram, M. (2024). Do cash holdings impact the financials of companies? Evidence from India. Indian Journal of Finance, 18(3), 8–24. https://doi.org/10.17010/ijf/2024/v18i3/173614

Sharma, S. S., Phan, D. H., & Narayan, P. K. (2019). Exchange rate effects of US government shutdowns: Evidence from both developed and emerging markets. Emerging Markets Review, 40, 100626. https://doi.org/10.1016/j.ememar.2019.100626

Siddiqui, A. A., & Kushwah, S. V. (2021). Carbon emissions, economic growth and trade: Empirical evidence from trading nations. International Journal of Technology Management & Sustainable Development, 20(1), 61–78. https://doi.org/10.3390/su14159396

Siddiqui, A. A., & Kushwah, S. V. (2022). Oil prices and equity returns: Analysis of oil exporting economies. Bank Parikrama, 47(3–4), 137–158.

Soukotta, A., Yusuf, M., Zarkasi, & Efendi. (2023). Corporate actions, earning volatility, and exchange rate influence on stock price stability. Initiative: Journal of Economics, Accounting and Management, 2(2), 197–214. https://doi.org/10.30640/inisiatif.v2i2.807

Subba, S., Pandian, B. M., & Vishal, R. S. (2023). The temporal study of spot and futures market volatility: Cross linkages among the equity, commodity, and forex markets in India. Indian Journal of Research in Capital Markets, 10(3–4), 8–28. https://doi.org/10.17010/ijrcm/2023/v10i3-4/173428

UN Trade & Development. (2021). Trade and development report 2021. https://unctad.org/publication/trade-and-development-report-2021

Veeravel, V., Karthikeyan, K., & Remiya, P. R. (2021). Is the Indian stock market affected by COVID-19? : Evidence from cases or fatalities. Indian Journal of Research in Capital Markets, 8(3), 52–61. https://doi.org/10.17010/ijrcm/2021/v8i3/167957

Vevek, S., Selvam, M., & Sivaprakkash, S. (2022). The persistence of volatility in Nifty 50. Indian Journal of Research in Capital Markets, 9(2–3), 8–18. https://doi.org/10.17010/ijrcm/2022/v9i2-3/172549

Villarreal-Samaniego, D. (2021). The dynamics of oil prices, COVID-19 and exchange rates in five emerging economies in the atypical first quarter of 2020. Management Studies, 37(158), 17–27. https://doi.org/10.18046/j.estger.2021.158.4042

Zaremba, A., Kizys, R., Aharon, D. Y., & Demir, E. (2020). Infected markets: Novel coronavirus, government interventions, and stock return volatility around the globe. Finance Research Letters, 35, 101597. https://doi.org/10.1016/j.frl.2020.101597

Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19.Finance Research Letters, 36, 101528. https://doi.org/10.1016/j.frl.2020.101528

Živkov, D., Njegić, J., & Balaban, S. (2019). Revealing the nexus between oil and exchange rate in the major emerging markets—The timescale analysis. International Journal of Finance & Economics, 24(2), 685–697. https://doi.org/10.1002/ijfe.1686