Currency Market Contagion in the Next-11: An Application of EGARCH-BEKK Analysis

Muhammad Zia ur Rehman; Zain ul Abidin; Muhammad Mohsin; Sajjad Ahmad Baig

doi:10.62270/jirms.v6i2.112

Authors

Muhammad Zia ur Rehman Faisalabad Business School, National Textile University, Faisalabad, Pakistan https://orcid.org/0000-0003-3770-5883
Zain ul Abidin Faisalabad Business School, National Textile University, Faisalabad, Pakistan https://orcid.org/0000-0003-0716-1790
Muhammad Mohsin Hunan University of Humanities, Science and Technology, China https://orcid.org/0000-0003-2867-6910
Sajjad Ahmad Baig Faisalabad Business School, National Textile University, Faisalabad, Pakistan https://orcid.org/0009-0006-7450-1459

DOI:

https://doi.org/10.62270/jirms.v6i2.112

Keywords:

EGARCH Model, BEKK-GARCH, Currency Contagion, Next-11 Economies, Exchange Rate Volatility, Crisis Transmission, Emerging Markets

Abstract

Purpose—This study investigates volatility spillover effects among the Next-11 Countries' foreign exchange markets using advanced econometric methodologies. The aim is to check the contagion of the volatility of Next-11 emerging economies to provide stakeholders a better understanding while making policies for trading.

Methodology—We employ a Multivariate EGARCH model to examine volatility spillover patterns and a Diagonal-BEKK model to assess cross-market shock transmission effects. The analysis utilizes daily foreign exchange data spanning from January 3, 2000, to December 31, 2024, comprising approximately 6,248 observations across eleven emerging economies. The period of time is chosen to attend some of the major crisis periods so that the volatility pattern could be understood in these crises, and a forecast for future turmoil could be accessed.

Findings—Results demonstrate that Egypt, Indonesia, and Vietnam exhibit the strongest volatility transmission effects, with their previous return volatility significantly impacting all other Next-11 markets (p < 0.05). The BEKK model reveals significant bidirectional shock transmission across 87% of market pairs, indicating high interconnectedness among these emerging foreign exchange markets.

Implications—These findings provide crucial insights for international portfolio managers, currency traders, and policymakers in managing cross-border financial risks and developing effective hedging strategies in emerging market currencies. The study will also be very helpful for these economies in making trade policies with each other and creating more efficient ways to trade.

Originality/value—The work done is an original idea and is a literature-backed gap identified in the field of International Financial Management.