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Asymmetric mean reversion and volatility in African real exchange rates

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Abstract

This study seeks to examine the asymmetric mean reversion characteristics of the real exchange rate for Egypt, Ghana, Kenya, Nigeria and South Africa. We apply a two-factor model to monthly time series data spanning the period 1972:1 to 2016:12. The empirical findings suggest that the five countries’ real exchange rate exhibit non-stationary behaviour following local currency depreciation but is strongly mean reverting following local currency appreciation. However, the mean reverting component more than offsets the non-stationary component. We also found that the time-varying conditional volatility is persistence and asymmetric in all the five countries. These findings have policy and investment implications. Knowledge of purchasing power parity may be used to forecast exchange rates, manage inflation, and implement monetary policy. Also, investors could base their investment strategies on different regimes to minimise exchange rate risk.

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Notes

  1. The figures were retrieved from http://www.tradingeconomics.com/ on 14/03/2017.

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Acknowledgements

Financial support from the University of Ghana Business School is gratefully acknowledged. I am grateful to participants at the 24th Annual Global Finance Conference, Hempstead, New York, USA. I am are also indebted to the editor, and two anonymous reviewers whose constructive comments improved the article. All errors and omissions are solely mine.

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  1. Department of Finance, University of Ghana Business School, University of Ghana, P. O. Box LG 78, Legon, Accra, Ghana

    Saint Kuttu

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Kuttu, S. Asymmetric mean reversion and volatility in African real exchange rates. J Econ Finan 42, 575–590 (2018). https://doi.org/10.1007/s12197-017-9412-z

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