Abstract
M.Com. (Financial Economics)
This study intends to analyse the impact of exchange rate risk on equity returns and bond yields as well as the volatility spillover 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 dataset consists of each BRICS country’s exchange rate, namely the Brazilian real, Russian ruble, Indian rupee, Chinese yuan and South African rand, against the US dollar. In addition, the study makes use of stock market equity indices of each BRICS country, namely the Brazilian Bovespa Index; Russian Trading System Index (RTSI), National Stock Exchange (NSE) NIFTY 50 Index for India; Shanghai Stock Exchange Composite Index for China and FTSE/JSE All Share Index for South Africa. The other databases used are the ten-year government bond yields for each BRICS country, with sample data depending on availability, thus varying for each country: data for India and South Africa span from November 1996 to November 2016, Brazil’s data are from January 2006 to November 2016; Russia’s data span from April 2003 to November 2016 and the period of China’s data are from June 2002 to November 2016.
The results of estimation show that exchange rate volatility has a positive impact on ten-year bond yields in all BRICS countries except in South Africa, where the volatility of exchange rate has a negative impact. 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. These findings show that equity returns increase with the increase in exchange rate volatility in Brazil, India and South Africa, and decrease in China and Russia.
Furthermore, the results on volatility spillovers between the equity returns, bond yields and foreign exchange markets show that the transmissions are from capital markets to foreign exchange market in South Africa, while the volatility to currency markets influence capital markets in Russia. The results of the study give evidence of bidirectional volatility transmissions in Brazil and China. Surprisingly, in India, volatility is transmitted from foreign exchange markets to bond markets, while changes to equity influence the foreign exchange markets.
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