NDLI: Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test

Content Provider	Springer Nature Link
Author	Balcilar, Mehmet Gupta, Rangan Kyei, Clement Wohar, Mark E.
Copyright Year	2016
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-in-quantiles 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.
Starting Page	229
Ending Page	250
Page Count	22
File Format	PDF
ISSN	09237992
Journal	Open Economies Review
Volume Number	27
Issue Number	2
e-ISSN	1573708X
Language	English
Publisher	Springer US
Publisher Date	2016-02-06
Publisher Place	New York
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Economic policy uncertainty Exchange rate returns Volatility Nonparametric quantile causality Developed and emerging markets International Economics Development Economics European Integration Macroeconomics/Monetary Economics//Financial Economics Economic Policy
Content Type	Text
Resource Type	Article
Subject	Economics and Econometrics

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