Time-varying comovements among exchange rates : empirical evidence from Saudi Arabia and international economies

Abstract EN

The paper investigates the exchange rate comovements between Saudi Arabia and five heterogeneous countries during the period from 1995M1 to 2013M7.

The choice of heterogeneous economies is prompted by our desire to examine the cross-market linkages between Saudi Arabia and developing countries relative to developed countries.

For this purpose, we opt for the Dynamic Conditional Correlation multivariate GARCH (DCC-GARCH) model developed by Engle (2002) that has the advantage to assess the interrelations among markets in a time-varying framework.

We also apply the structural break approach of Bai and Perron (1998, 2003) to detect potential change dates given that the estimation period is characterized by various domestic and international events that may alter the comovements among markets.

The results indicate that the Saudi market is highly and positively correlated with economies with which it is financially and economically linked.

However, there is evidence of relatively low and negative correlation between Saudi Arabia and the other considered countries.

The findings also reveal regime-shifts in the dynamicconditional correlations, which may be explained by the 1997 Thai baht collapse, the 2008 global financial crisis, and domestic events.

Overall, the relevance of the econometric approaches allows obtaining reliable results.

The findings are of great interest for currency risk management, international portfolio diversification and trade, and provide important policy and economic implications for central banks.