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http://dx.doi.org/10.13106/jafeb.2021.vol8.no1.023

Symmetric and Asymmetric Effects of Financial Innovation and FDI on Exchange Rate Volatility: Evidence from South Asian Countries  

QAMRUZZAMAN, Md. (School of Business and Economics, United International University)
MEHTA, Ahmed Muneeb (Hailey College of Banking and Finance, University of the Punjab)
KHALID, Rimsha (Department of Business and Management, Limkokwing University of Creative Technology)
SERFRAZ, Ayesha (Institute of Administrative Sciences, University of the Punjab)
SALEEM, Hina (Institute of Business and Information Technology, University of the Punjab)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.1, 2021 , pp. 23-36 More about this Journal
Abstract
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.
Keywords
FDI; Financial Innovation; Exchange Rate Volatility; ARDL; NARDL;
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