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The Impact of Exchange Rate Volatility on World and Intra-trade Flows of SAARC Countries

Author

Listed:
  • HOOY, CHEE-WOOI

    (University Sains Malaysia)

  • CHOONG, CHEE-KEONG

    (University Tunku Abdul Rahman)

Abstract

Does exchange rate volatility affect world and bilateral trade flows of SAARC countries? Based on conditional exchange rate volatility generated from an asymmetric exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model, the results of the export demand function estimated by bounds testing approach revealed that there exists long-run steady state equilibrium among exports, income, price differential and exchange rate volatility in Bangladesh, India, Pakistan and Sri Lanka. Exchange rate volatility has a significant positive effect on real exports in most, but not all the South Asian countries. The study supports the hypothesis that exchange rate volatility imposes costs on risk-averse market participants and responds by favouring to trade at the margin. Hence, this induces intra-trade flows among South Asian countries.

Suggested Citation

  • Hooy, Chee-Wooi & Choong, Chee-Keong, 2010. "The Impact of Exchange Rate Volatility on World and Intra-trade Flows of SAARC Countries," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 45(1), pages 67-86.
    • Handle: RePEc:dse:indecr:0015
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    Citations

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    Cited by:

    1. Mohsen Bahmani-Oskooee & Sujata Saha, 2021. "On the asymmetric effects of exchange rate volatility on the trade flows of India with each of its fourteen partners," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 14(1), pages 66-85, January.
    2. Adedeji Daniel Gbadebo, 2023. "Does Exchange Rates Swings Affect Trade? Evidence from an Emerging Open Economy," International Journal of Economics and Financial Issues, Econjournals, vol. 13(1), pages 132-143, January.
    3. Pabai Fofanah, 2020. "Effects of Exchange Rate Volatility on Trade: Evidence from West Africa," Journal of Economics and Behavioral Studies, AMH International, vol. 12(3), pages 32-52.
    4. P., Srinivasan & M., Kalaivani, 2012. "Exchange Rate Volatility and Export Growth in India: An Empirical Investigation," MPRA Paper 43828, University Library of Munich, Germany.
    5. Mukesh Kumar & Azeema Begam & Nargis, 2020. "The Impact of Currency Depreciation on Exports of SAARC Countries," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(1), pages 16-29, March.
    6. Mohsen Bahmani-Oskooee & Sujata Saha, 2020. "Exchange rate risk and commodity trade between U.S. and India: an asymmetry analysis," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 25(4), pages 675-695, October.
    7. Javed Iqbal & Misbah Nosheen & Mark Wohar, 2023. "Exchange rate volatility and India–US commodity trade: evidence of the third country effect," Indian Economic Review, Springer, vol. 58(2), pages 359-398, September.

    More about this item

    Keywords

    Exports; Bound Test; Asymmetric Exchange Rate Volatility; EGARCH;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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