The impact of covid 19 on foreign exchange market volatility: evidence from Latin America

Abstract EN

The study investigates the impact of COVID 19 on the volatility of exchange rate returns in Latin America.

GARCH and EGARCH models are used to conduct the analysis with the inclusion of COVID 19 as an exogenous variable in the conditional mean and variance equations.

The results of our study indicate a significant negative effect of COVID 19 on exchange rate returns in Brazil, The volatility of the BRL/USD and MXN/USD returns is positively influenced by corona virus.

A leverage and asymmetric effects are found in the markets which explains that the markets reacts differently to positive and negative shocks of the same magnitude, bad news tend to have a higher effect on the conditional volatility of the Brazilian and Mexican exchange rate markets.

EGARCHX (1, 1) is the best model to capture the volatility of the returns of BRL/USD and MXN/USD exchange rates.