Do commodity price volatilities impact currency misalignments in commodity-exporting countries?
This paper aims to investigate the relationship between misalignments of real effective exchange rates and real commodity price volatilities in a sample of 46 commodity-exporting countries by considering financial development as the transition variable. We first estimate currency misalignments as deviations of the observed real effective exchange rates from their equilibrium values estimated using the behavioural equilibrium exchange rate (BEER) approach. Then, we rely on panel data and a smooth-transition regression model to estimate commodity price volatilities' non-linear impacts on currency misalignments. Our results indicate that the estimated coefficients are highly significant, and demonstrate that real commodity prices' volatility has a non-linear impact on currency misalignments depending on the country's degree of financial development.
New evidence on time-varying financial integration within Gulf Cooperation Council stock markets
The aim of this study is to investigate the dynamics of regional financial integration among Gulf Cooperation Council (GCC) countries by pricing the local stock market return based on different risk premia related to the regional stock market and exchange market. Our approach is based on the international capital asset pricing model (ICAPM), which accounts for the degree of financial integration in the pricing of market risk premia. We also construct a regional currency basket, named Khaleeji, in order to obtain a reference currency in this area and to prospect the twin objective: a lesser peg to the US dollar and the emergence of regional monetary cooperation. Our main findings show that GCC stock markets are impacted by both regional and local financial shocks and crises. Analysis of the long-term dynamics highlights that the regional risk premium is not negligible for GCC countries, and better cooperation can enhance regional risk-sharing. The results also indicate that the degree of regional financial integration varies from country to country, leaning toward a partial integration level of GCC countries within their region. The increasing importance of regional risk premia and financial integration could encourage further financial cooperation among GCC countries, ultimately leading to better economic integration.
Do sovereign wealth funds dampen the effect of oil market volatility on gross domestic product growth?
This paper examines the effect of oil price volatility on gross domestic product (GDP) growth in some oil-exporting countries. The analysis becomes more pertinent when we consider the role of sovereign wealth funds (SWFs) as a driver to counter the exhaustibility of revenue by transforming nonrenewable resources into sustainable income. The main contribution made by this paper is our assessment of the role of SWF asset growth in dampening the effect of oil market volatility on GDP growth. To test this effect, we rely on a panel smooth transition regression model which is useful for describing heterogeneous panels, with regression coefficients that fluctuate between a limited number of “extreme regimes” depending on the SWF assets’ size. Our findings demonstrate that this effect is nonlinear and depends on the threshold level of SWF asset growth. The estimated coefficient is negative in the first regime and becomes positive beyond the threshold value (ie, 19%) in the second regime. We also test a second specification of the model by considering the effect of the volatility of per capita oil export revenue on GDP growth and show that SWF asset growth plays a significant role in dampening the effect of oil market volatility on GDP growth, mainly in the second regime when SWF asset growth reaches a high growth level.
Non-linear relationship between real commodity price volatility and real effective exchange rate: The case of commodity-exporting countries
The aim of this paper is to contribute to the existing literature by exploring the relationship between the real commodity price volatilities and the real effective exchange rate (REER) of commodity-exporting countries, taking into account the transition variable of financial market integration. To this end, we consider a sample of 42 commodity-exporting countries subdivided into 4 panels: food and beverages, energy, metals, and raw materials. Our results highlight that the relationship between real commodity price volatility and REER is non-linear and depends on the degree of financialization of the commodity market. Specifically, when a country is poorly integrated financially, the volatility of the real commodity price has a strong and negative impact on the variation in REER. However, for periods when a country is better integrated financially, we observe a decrease in the impact of real commodity price volatility on REER, especially for the two panels of food and beverages as well as energy. Our findings also highlight the growth of financialization of commodities post-2000, particularly in the case of the energy sector.
Effects of financial turmoil on financial integration and risk premia in emerging markets
The aim of this article is to analyze how financial crises affect the dynamics of international financial integration and of the risk premia in emerging markets. Accordingly, we estimate a variant of the International Asset Pricing Model developed by Carrieri et al. (2007), allowing for time-varying stock market integration, in which we include the foreign currency risk. Our sample consists of monthly data for 12 emerging stock markets over the period 1988M3-2015M3. We find that while the financial integration of emerging stock markets has registered short-term reversals episodes in countries that have been exposed to national or/and regional financial crises, it has decreased in most of the emerging countries of our sample since the global crisis. Moreover, the upward trend in financial integration has not reduced the local market risk premium component as much as could be expected. However, the recent global crisis has induced a reassessment of the world market risk premium for all emerging countries, highlighting the global nature of the crisis. © 2016 Elsevier B.V..
Regional integration of the East Asian stock markets: An empirical assessment
The aim of this paper is to study the dynamics of regional financial integration in East Asia over the 1990:01-2012:08 period. To this end, we use the international capital asset pricing model (ICAPM) to assess the evolution of financial market integration through time and evaluate their risk premia. We also construct an Asian currency basket in order to obtain a reference currency in this area. Our empirical analysis is based on the multivariate GARCH-DCC approach with time-varying correlations. Our results show that the East Asian stock markets were partially segmented (except for Japan) within their region until approximately 2008. However, the last years are characterized by an upward trend in the regional integration of stock markets. Our findings also show that the risk premium related to regional stock markets is significant for all countries. © 2015 Elsevier Ltd.