Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?

IMF Working Papers, October 17, 2016

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Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?

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Bibliographic details

• Authors: Nasha Maveé, Roberto Perrelli, Axel Schimmelpfennig
• Published: October 17, 2016
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475545425.001

Summary and research question

• Investigates possible drivers of volatility in the South African rand since the onset of the global financial crisis.
• Assesses the role of:
  • local and international economic surprises,
  • commodity price volatility,
  • global market risk perceptions,
  • local political uncertainty.
• Measure of rand volatility: a market-based implied volatility indicator for the rand / U.S. dollar exchange rate.
• Economic surprises captured by Citi’s Economic Surprise Index available for South Africa and its main economic partners.

Methodology

• Uses a market-based implied volatility indicator for the rand / U.S. dollar exchange rate as the dependent variable.
• Uses Citi’s Economic Surprise Index (difference between market expectations and data prints) for South Africa, the United States, Europe, and China.
• Examines commodity price volatility, global market volatility, and a measure of domestic political uncertainty as explanatory variables.

Key findings

• Rand volatility is mainly driven by:
  • commodity price volatility,
  • global market volatility,
  • domestic political uncertainty.
• Economic surprises originating in the United States matter for rand volatility.
• Economic surprises originating from South Africa, Europe, or China do not have a significant effect on rand volatility (as reported).

Policy-relevant implications

• Monitoring commodity price volatility and global market risk perceptions is important for understanding and managing rand volatility.
• Domestic political uncertainty is a significant domestic determinant—addressing political uncertainty could reduce exchange rate volatility.
• Attention to U.S. economic surprises is warranted given their measurable impact on rand volatility; domestic and regional economic surprises appear less influential in this context.

Content in this bundle

• Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?
  • Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility? (Markdown version)
  • Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility? (PDF)