Exchange rate risk and trade flows: the case of Belarus, Kazakhstan, Russia, and Ukraine

This study attempts to examine the effects of exchange rate risk on aggregate bilateral trade flows employing gravity models for Belarus, Kazakhstan, Russia, and Ukraine. The empirical analysis uses the quarterly data for the period generally from 1995Q1 to 2008Q4. In this study, the gravity models have been estimated which is perceived as the better model in predicting the bilateral trade between countries using the panel data techniques. For the measure of exchange rate risk, this study has estimated various GARCH family models assuming various distribution hypotheses and selected the best-fitted model relying on the forecasting performance. The estimation results reveal that the gravity models better explain the bilateral trade between countries under study and their major trade partners.