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Volatility Spillovers and Dynamic Correlations among Foreign Exchange Rates and Bond Markets of Emerging Economies

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  • Resul Aydemir
  • Bulent Guloglu
  • Ercan Saridogan

Abstract

In this paper, we first examine how important historical shocks during and after the 2007-2008 global financial crisis affect the size and the persistence of volatilities among exchange rates and the ten-year bond rates of the Fragile Five countries (i.e., Brazil, India, Indonesia, South Africa and Turkey). We then investigate separately the dynamic interactions between exchange rates and the ten-year bond rates of the Fragile Five. We utilize a multivariate GARCH model (FIAPARCH-DCC model) and volatility impulse response functions to achieve these objectives. The results suggest that shocks’ positive impacts on expected conditional variances of the variables are largely market-specific and different. Shocks have a more significant impact on bond markets than on foreign exchange markets. We also find that the dynamic conditional correlation series of bonds exhibit much lower correlations than those associated with exchange rate returns.Keywords: Volatility spillovers, Exchange rates, Interest rates, Dynamic correlations, Emerging markets. JEL: C32, F31, G12, G15.

Suggested Citation

  • Resul Aydemir & Bulent Guloglu & Ercan Saridogan, 2021. "Volatility Spillovers and Dynamic Correlations among Foreign Exchange Rates and Bond Markets of Emerging Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 68(1), pages 99-127.
    • Handle: RePEc:voj:journl:v:68:y:2021:i:1:p:99-127:id:952
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    More about this item

    Keywords

    Volatility spillovers; Exchange rates; Interest rates; Dynamic correlations; Emerging markets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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