Time-varying connectedness and contagion between commodity prices and exchange rate in Sub-Saharan Africa
Date
2023
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Cogent Economics & Finance
Abstract
Market participants, policymakers, and practitioners might have ignored
the connection between global commodities and the currency markets in sub-Saharan Africa and the potential for contagion at various time scales. We examine
the degree of time-varying connectivity and contagion between commodities and
the exchange rates of sub-Saharan African countries (SSA). We use the Barunik and
Krehlik (BK18) spillover index on monthly data from 1990 to 2019 to illustrate the
dynamic connectivity in the time and frequency domains. The BK18 captures the
nonlinear, nonstationary, asymmetric, and time-dependent comovements in the
relationship. Our analysis indicates that the relationship between commodity
returns and exchange rates in Sub-Saharan Africa (SSA) is both time- and frequency-dependent, but stronger at higher frequencies. We observe that, among
Of the three commodities, only crude oil is a dominant spillover propagator. The
exchange rates of South Africa dominate spillover transmission among metal-producing countries, and those of Cote d’Ivoire dominate agricultural-producing countries.
countries. The dynamic results reveal significant spillovers between commodities
and exchange rates during economic turmoil, indicating contagion among the
markets. Since uncertainty spillover is more severe amid market upheaval, investors
should use their awareness of market dynamics and fluctuations to protect their
holdings from lower asset returns. Policymakers should keep a close eye on spillovers because they endanger cross-market connections
Description
Research Article
Keywords
commodity prices, exchange rate, contagion