Investigating Spillover Effects between Foreign Exchange Rate Volatility and Commodity Price Volatility in Uganda

Abstract

This study investigates the impact of commodity price volatility spillovers on financial sector stability. Specifically, the study investigates the spillover effects between oil and food price volatility and the volatility of a key macroeconomic indicator of importance to financial stability: the nominal Uganda shilling per United States dollar (UGX/USD) exchange rate. Volatility spillover is examined using the Generalized Vector Autoregressive (GVAR) approach and Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH) techniques, namely the dynamic conditional correlation (DCC), constant conditional correlation (CCC), and varying conditional correlation (VCC) models. Overall, the results of both the GVAR and MGARCH techniques indicate low levels of volatility spillover and market interconnectedness except during crisis periods, at which point cross-market volatility spillovers and market interconnectedness sharply and markedly increased. Specifically, the results of the MGARCH analysis show that the DCC model produces the best results. The obtained results point to an amplification of dynamic conditional correlations during and after the global financial crisis (GFC), suggesting an increase in volatility spillovers and interdependence between these markets following the global financial crisis. This is also confirmed by the results of the total spillover index based on the GVAR analysis, which shows low but time-varying volatility spillover that intensified during periods of high uncertainty and market crises, particularly during the global financial crisis and sovereign debt crisis periods.

Influence of Real Exchange Rate on the Finance-Growth Nexus in the West African Region

“…Similarly, this study shows that real exchange rate volatility has a deleterious effect on the impact of financial development on economic growth in the West African region. This is consistent with the theoretical literature which contended that high and volatile real exchange rate has the potential to diminish international trade, weaken macroeconomic stability, distort price transparency and inhibit international financial integration (see Bleaney and Greenaway 2001;Katusiime 2019;Razmi et al 2012). Thus, real shocks and financial shocks are related, since the latter are significantly amplified in countries with high exchange rate fluctuations.…”

“…Besides its direct effect on economic growth, studies have shown that real exchange rate and financial development could have a dynamic relationship. Lin and Ye (2011) posited that financial development has a significant effect on the choice of exchange rate regime, whereas Katusiime (2018) reported that exchange rate has a significant effect on the growth of private sector credit. Thus, countries with less developed financial markets are more likely to adopt a fixed exchange rate, while countries with higher levels of financial development are more likely to adopt a flexible system, which in turn determines the exchange rate.…”

Volatility Transmission between Oil Prices and Stock Prices as a New Source of Instability: Lessons from the UK Experience

“…Oil is a large commodity and, as such, it determines significant volatilities and fluctuations in price to a greater extent than other more stable investments (Chang, McAleer, & Wang, 2018). According to this theory, there are many spillover effects of oil prices; for example, oil prices are affected by a variety of factors and spillovers, as they are particularly responsive to decisions about outputs developed by oil authorities (Katusiime, 2019). Similar to any other product or good, laws and supply and demand also have a VS effect on the prices of oil, and bank prices and production costs have a spillover effect on oil prices.…”

Large fluctuations of China's commodity prices: Main sources and heterogeneous effects

“…The empirical findings denoted that the effect of commodity demand shocks on commodity prices was much greater than that in commodity supply shocks. Katusiime (2019) applied GARCH and Generalized Vector Autoregressive (GVAR) models to investigate the relationship between Uganda's commodity price fluctuations and financial sector stability, and found that the link between the two is close except the financial crisis. Moreover, oil and agricultural product price fluctuation is one of the main drivers of commodity price fluctuation.…”