Exchange Rate Dependency Between Emerging Countries-Case of Black Sea Countries

Abstract

Research Question: This study tries to answer the following question, Does exchange rate shocks on one of the Black Sea countries affect the neighbour’s countries' currencies. Motivation: Many different financial crises that afflicted the countries of the Black Sea region over different periods and thus affected their exchange rate. Idea: Hence, this study examines the existence of currency dependency in the form of a geographical pattern in the Black Sea countries and tests. The study measures the cross-market dependency by looking for significant dependency in the tails; any significant dependency reflects the co-movement in the market during the depreciation or appreciation period. Data: The study sample consists of daily observations of bilateral exchange rates against the US dollar for the countries of the Black Sea region (Russia, Romania, Ukraine, Turkey, Georgia, and Bulgaria); the total number of observations reached 7842, with 1307 views for each country during the period from 1st of Jan 2015 to the 26th of Feb 2020. Method/Tools: we employ the Regular Vine copula approach, which is multivariate copula functions; this approach deal with dependency between variables by using tail dependence coefficients to assess the interdependency of both positive and negative extreme cases. Findings: The results of the study indicate the existence of a strong geographical pattern of currency dependency between Black Sea countries as follow: First, The Russian Ruble affect all the countries of the Black Sea region in the of appreciation and depreciation periods except on Turkey, just in depreciation periods, there's no dependency in appreciation periods between Turkey and Russia. Second, the Turkish Lira effects on both Ukrainian Hryvnia and Bulgarian Leva in appreciation and depreciation periods. Third, Bulgarian Leva affects Ukrainian Hryvnia in appreciation and depreciation periods, and finally, Georgian Lari affects only Ukrainian Hryvnia in depreciation periods. Contributions: This study is considered the first study that discusses regional contagion in Black Sea countries, providing insight into how the exchange rate in one of these countries reacts to exchange rate crises in the others.