Abstract
Purpose
The purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.
Design/methodology/approach
We augment theoretical nominal exchange rate models available in the literature with the geopolitical risk index developed by Caldara and Iacoviello (2019), and then estimate these models using the ARDL approach to Cointegration.
Findings
Our analysis uncovers evidence of Cointegration in the exchange rate models when the MYR-USD, IDR-USD, THB-USD and PHP-USD exchange rates are used as dependent variable. Next, geopolitical risk is a significant long-run driver for these exchange rates. Third, in all countries higher geopolitical risk leads to a depreciation of domestic currency.
Research limitations/implications
There are implications for entrepreneurs, central banks, portfolio managers and arbitrageurs who actively trade in financial markets. Financial market players can benefit from a better understanding of how geopolitical events affect the portfolio of financial assets across various countries, while entrepreneurs can work out hedging strategies.
Originality/value
This is a contribution to the study of interlinkages between political risk and foreign exchange markets. It is the first study to adopt the geopolitical risk index of Caldara and Iacoviello (2019) to the study the foreign exchange markets of ASEAN countries.
The purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.
Design/methodology/approach
We augment theoretical nominal exchange rate models available in the literature with the geopolitical risk index developed by Caldara and Iacoviello (2019), and then estimate these models using the ARDL approach to Cointegration.
Findings
Our analysis uncovers evidence of Cointegration in the exchange rate models when the MYR-USD, IDR-USD, THB-USD and PHP-USD exchange rates are used as dependent variable. Next, geopolitical risk is a significant long-run driver for these exchange rates. Third, in all countries higher geopolitical risk leads to a depreciation of domestic currency.
Research limitations/implications
There are implications for entrepreneurs, central banks, portfolio managers and arbitrageurs who actively trade in financial markets. Financial market players can benefit from a better understanding of how geopolitical events affect the portfolio of financial assets across various countries, while entrepreneurs can work out hedging strategies.
Originality/value
This is a contribution to the study of interlinkages between political risk and foreign exchange markets. It is the first study to adopt the geopolitical risk index of Caldara and Iacoviello (2019) to the study the foreign exchange markets of ASEAN countries.
Original language | English |
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Pages (from-to) | 1543-1564 |
Number of pages | 22 |
Journal | International Journal of Emerging Markets |
Volume | 17 |
Issue number | 6 |
Early online date | 19 Jan 2021 |
DOIs | |
Publication status | Published - 14 Jun 2022 |
Keywords
- ASEAN
- Cointegration
- Exchange rate
- Geopolitical risk
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- General Business,Management and Accounting
- Business and International Management