Oil Price Shocks, Uncertainty and Exchange Rate Returns in Developing Countries
- David Umoru
- Timothy Igbafe Aliu
- Beauty Igbinovia
- ( paper pages. 367 - 400 )
Abstract
Based on DCC-GARCH and Markov regime switching models, the paper
examines how country-specific economic policy uncertainty and Brent oil price
shocks affect the currency returns of 20 African countries. This paper focused
on monthly series, and the timeframe used was between June 1, 2016, and
December 31, 2023. Findings of the DCC-GARCH model indicate that
country-specific uncertainty and oil price shocks had a negative impact on the
returns of exchange rate, and were relevant both in developing and developed
economies. The outcomes estimated indicate that shocks from oil price
variations as well as the uncertainty index were associated with depreciation
of the exchange value of local currencies and therefore reduced returns. The
uncertainty that comes with economic policies determines exchange-rate
fluctuations. The Markov regime switching model estimations confirm that when
there is a boom surge, exchange rate returns are greatly and positively
influenced by oil price shocks, whereas uncertainty in market news results in
considerable fall in returns at both low and high volatility phases. Higher
oil-price shocks have adverse effects on the external value of a currency during
a high volatility period. This influence gives off unsettling signals to
overseas activities of forex market investors, which could harm the market's
performance. This study is valuable for foreign exchange market investors in
search of positive returns.
Citation
David Umoru, Timothy Igbafe Aliu, Beauty Igbinovia.
2025.
"Oil Price Shocks, Uncertainty and Exchange Rate Returns in Developing Countries"
The Nigerian Journal of Economic and Social Studies,
67 (3): 367 - 400.
