Directional predictability in foreign exchange rates of emerging markets: New evidence using a cross-quantilogram approach
Abstract
This study investigates the directional predictability of exchange rates in emerging markets. Using a cross-quantilogram model, we show that
dependencies among emerging markets exchange rates are heterogeneous. Specifically, the Mexican peso, Brazilian real, and Turkish lira are
leading emerging market currencies that provide hedging opportunities for currency investors. The structural dependencies across the pairs of
exchange rates are evident at lag 1, and the relationships dissipate at longer lags. Secondly, the partial cross-quantilogram results indicate that oil
is not a driving force of interrelationship among the exchange rates. Furthermore, the estimations of cross-quantile correlations from recursive
subsamples reveal time-variant traits. If policymakers and financial regulators focus on comovements among emerging market currencies and
distinguish net recipients from net transmitters in different environments, they can devise a surveillance system to adjust the market interde-
pendence effects across emerging market foreign exchange rates. Therefore, they can promote the stability of emerging market currencies.
Copyright © 2021 Borsa _Istanbul Anonim S ̧ irketi. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
JEL classification: C33; F31; O24; E61
Keywords: Emerging markets; Currencies; Exchange rates; Cross-quantilogram; Directional predictability
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