Journal
JOURNAL OF ASIAN FINANCE ECONOMICS AND BUSINESS
Volume 8, Issue 1, Pages 23-36Publisher
KOREA DISTRIBUTION SCIENCE ASSOC
DOI: 10.13106/jafeb.2021.vol8.no1.023
Keywords
FDI; Financial Innovation; Exchange Rate Volatility; ARDL; NARDL
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The study explores the relationship between foreign direct investment (FDI), financial innovation, and exchange rate volatility in selected South Asian countries from 1980 to 2017. Findings suggest that in the long run, financial innovation, FDI inflows, and exchange rate volatility are interrelated. Additionally, continuous FDI inflows and innovation in the financial sector help reduce volatility in the foreign exchange market.
The study explores the nexus between foreign direct investment (FDI), financial innovation, and exchange rate volatility in selected South Asian countries for 1980 to 2017. The study applies the unit root test, Autoregressive Distributed Lagged, nonlinear ARDL, and causality test following Toda-Yamamoto. Unit root tests ascertain that variables are integrated in a mixed order; few variables are stationary at a level and few after the first difference. Empirical model estimation with ARDL, Long-run cointegration revealed with the tests of FPSS, WPSS, and tBDM by rejecting the null hypothesis of no cointegration. This finding suggests that, in the long-run financial innovation, FDI inflows, and exchange rate volatility move together. Moreover, study findings established adverse effects running from FDI inflows and financial innovation to exchange rate volatility in the long run. These findings suggest that continual FDI inflows and innovativeness in the financial system assist in lessening the volatility in the foreign exchange market. Furthermore, nonlinear ARDL confirms the presence of asymmetric cointegration in the model. The standard Wald test established asymmetric effects running from FDI inflows and financial innovation to exchange rate volatility, both in the long and short run. Directional causality unveils feedback hypothesis holds for explaining causality between FDI, financial innovation, and exchange rate volatility.
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