Does economic policy uncertainty predict exchange rate returns and volatility?- evidence from a nonparametric causality-in-quantiles test

Show simple item record Balcilar, Mehmet Gupta, Rangan Kyei, Clement Kweku Wohar, Mark E. 2016-05-05T14:03:05Z 2016-04
dc.description.abstract Recent studies have analysed the ability of measures of uncertainty to predict movements in macroeconomic and financial variables. The objective of this paper is to employ the recently proposed nonparametric causality-inquantiles test to analyse the predictability of returns and volatility of sixteen U.S. dollar-based exchange rates (for both developed and developing countries) over the monthly period of 1999:01–2012:03, based on information provided by a news-based measure of relative uncertainty, i.e., the differential between domestic and U.S. uncertainties. The causality-in-quantile approach allows us to test for not only causality-in-mean (1st moment), but also causality that may exist in the tails of the joint distribution of the variables. In addition, we are also able to investigate causality-in-variance (volatility spillovers) when causality in the conditional-mean may not exist, yet higher order interdependencies might emerge. We motivate our analysis by employing tests for nonlinearity. These tests detect nonlinearity, as well as the existence of structural breaks in the exchange rate returns, and in its relationship with the EPU differential, implying that the Granger causality tests based on a linear framework is likely to suffer from misspecification. The results of our nonparametric causality-in-quantiles test indicate that for seven exchange rates EPU differentials have a causal impact on the variance of exchange rate returns but not on the returns themselves at all parts of the conditional distribution. We also find that EPU differentials have predictive ability for both exchange rate returns as well as the return variance over the entire conditional distribution for four exchange rates. en_ZA
dc.description.department Economics en_ZA
dc.description.embargo 2017-03-31
dc.description.librarian hb2016 en_ZA
dc.description.uri en_ZA
dc.identifier.citation Balcilar, M, Gupta, R, Kyei, C & Wohar, ME 2016, 'Does economic policy uncertainty predict exchange rate returns and volatility? Evidence from a nonparametric causality-in-quantiles test', Open Economies Review, vol. 27, no. 2, pp. 229-250. en_ZA
dc.identifier.issn 0923-7992 (print)
dc.identifier.issn 1573-708X (online)
dc.identifier.other 10.1007/s11079-016-9388-x
dc.language.iso en en_ZA
dc.publisher Springer en_ZA
dc.rights © Springer Science+Business Media New York 2016. The original publication is available at : . en_ZA
dc.subject Economic policy uncertainty en_ZA
dc.subject Exchange rate returns en_ZA
dc.subject Volatility en_ZA
dc.subject Nonparametric quantile causality en_ZA
dc.subject Developed and emerging markets en_ZA
dc.title Does economic policy uncertainty predict exchange rate returns and volatility?- evidence from a nonparametric causality-in-quantiles test en_ZA
dc.type Postprint Article en_ZA

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