Comparative Analysis of Return Spillovers among Emerging Asian Currencies before and after the Inauguration of Belt and Road Initiative

Abstract

This study investigates return spillovers in emerging foreign exchange markets by comparing the pro and post BRI periods. We employed daily exchange rate returns from 10 emerging Asian economies including Turkey, India, Sri Lanka, Indonesia, Pakistan, Philippine, Thailand, China and Vietnam against United States Dollar. For calculation of total and directional connectedness, Diebold and Yilmaz (2012) methodology based of GFEVD has been used. For this purpose the data is categorized into 2 periods; Prior to and following the BRI, with 2013 as the demarcation year. The results indicate that spillovers remained robust during both the periods; however, the total spillover index experienced a minor fall following the inauguration of BRI. Some crucial shifts in the magnitude and direction of spillovers are also documented. Particularly, Chinese Yuan with a net recipient role in the pre BRI period transformed to net transmitter in preceding period. Our analysis carries important insights and significant ramifications for Investors Institutional and individual as well as regulators like central banks for formulating prudential regulations for market stability.