Monografico

DOI: http://dx.doi.org/10.25115/eea.v39i1.4085

Volumen:39-2 // ISSN: 1133-3197

The Effect of the Global Financial Crisis on the Asymmetric

Relationship between Exchange Rate Volatility and Trade
Flows
BISHARAT HUSSAIN CHANG1, NIAZ AHMED BHUTTO2, FARHAN AHMED3, ZAHIDA ABRO4,
NADIA ANJUM5
1
Department of Management Sciences, SZABIST LARKANA CAMPUS, LARKANA, PAKISTAN.
E-mail: bisharat.chang86@gmail.com
2
Department of Business Administration, SUKKUR IBA UNIVERSITY, SUKKUR, PAKISTAN.
E-mail: niaz@iba-suk.edu.pk
3
Department of Economics and Management Sciences, NED UNIVERSITY OF ENGINEERING AND TECHNOLOGY,
PAKISTAN. E-mail: fahmed.ned@gmai.com
4
Department of Management Sciences, SZABIST LARKANA CAMPUS PAKISTAN.
E-mail: abroo@lrk.szabist.edu.pk
5
Department of Business Administration, SUKKUR IBA UNIVERSITY, SUKKUR, PAKISTAN.
E-mail: nadia.anjum@iba-suk.edu.pk

ABSTRACT

Recent literature has shifted to examining whether the relationship between exchange rate volatility and trade
flows is symmetric or asymmetric. However, this literature does not provide consistent findings. We extend the
existing literature by examining whether the asymmetric relationship between exchange rate volatility and trade
flows changes as a result of the global financial crisis. For this purpose, we use a nonlinear ARDL model on both
the pre and the post-crisis period data. The pre-crisis and post-crisis periods cover the data from January 1986
to August 2008 and September 2008 to January 2018 respectively. Results indicate that the relationship changes,
as a result, a global financial crisis however, this relationship is country specific as well on the type of model
(export or import) selected.
Keywords: exchange rate volatility; global financial crisis; NARDL; trade flows
JEL Classification: F31

Recibido: 2 de Noviembre de 2020

Aceptado:8 de Enero de 2021
 Bisharat Hussain Chang, Niaz Ahmed Bhutto, Farhan Ahmed, Zahida Abro, Nadia Anjum

1. Introduction

Bretton Woods fixed exchange rate system collapsed in 1973. Since then various studies have been
conducting the relationship between exchange rate volatility and trade flows. As time passed, more
elaborated techniques have been designed, however, so for past studies do not find any consistent
relationship between exchange rate volatility and trade flows. Therefore, there is still a need to further
explore the relationship between these variables.
Previous literature suggests that exchange rate volatility either affects trade flows positively or
negatively (Bahmani-Oskooee and Aftab, 2017). It is generally considered that traders avoid trading
when there is an increase in exchange rate volatility. However, other traders who are risk lover can
increase the trade when there is an increase in the exchange rate volatility. They increase the trade
because they are optimistic and expect that they can get more profit as a result of an increase in the
exchange rate. Moreover, the other opinion is that effective hedging may completely eliminate the
risk that is caused as a result of an increase in the exchange rate volatility. Following the theoretical
literature, various empirical studies have also been conducted as well however, the results of these
empirical studies are also mixed.
There are some of the survey studies which thoroughly survey the existing literature (McKenzie,
1999; Bahmani-Oskooee and Hegerty, 2007; and Auboin and Ruta, 2013). These surveys provide
various justifications for positive, negative or no impact of volatility on the trade flows. First, when the
firm has no hedging opportunities, then the firm has to pay more to bear the exchange rate risk which
therefore decreases the trade flows (Clark, 1973; Ethier, 1973; and Hooper and Kohlhagen, 1978).
Second, when the exchange rate volatility increases, it reduces the firm’s profitability and as a result,
firms increase sales for compensating the low profitability (Franke, 1991; Ethier, 1973; Hooper and
Kohlhagen, 1978). The third view is that exchange rate volatility neither affects trade flows positively
nor it affects negatively. However, this relationship mainly depends upon the risk aversion parameter
of the model (De Grauwe, 1988; Dellas and Zilberfarb, 1993).
Various empirical studies have been conducted which examine this relationship. Bahmani-Oskooee,
Hegerty, and Hosny (2015); Pino et al. (2016) and Kim (2017) conclude that there is a negative
relationship between exchange rate volatility and trade flows. Whereas some of the other studies
support a positive relationship between these variables (McKenzie, 1999; Bahmani-Oskooee and
Hegerty, 2007; Bahmani-Oskooee, Hegerty and Zhang, 2014). Bahmani-Oskooee, Iqbal, and Khan
(2017) also found a positive relationship between exchange rate volatility and trade flows.
This study focuses on the exchange rate volatility and the US trade flows with its four major trading
partners from the developing countries- Mexico, India, South Africa, and Brazil. We focus on the US
economy since the US is globally dominant country and the majority of the trade involves the US dollar.
In addition, the US economy is more open now than what it was in the 1960s. Figure 1.1 indicates that
during 1960s imports and the exports of the US were 4 to 5% of GDP, whereas after 1960s it crossed
12 to 14%. In addition, we also select these four trading partners since they are major trading partners
of the US.
Another gap in the existing literature is that it mainly focuses on the linear relationship between
exchange rate volatility and trade flows. These linear models assume that the relationship is
symmetric. However, in reality, there is an asymmetric relationship among the economic and financial
variables (Anoruo, 2011). Economic agents react differently to the positive and negative changes in
the economic variables (Rocher, 2017). Some other authors also support the asymmetry among the
economic and financial variables (Bildirici and Turkmen, 2005, Hatemi-J, 2012, Kalu, 2017). This study,
therefore, contributes the existing literature by examining whether exchange rate volatility
symmetrically or asymmetrically affects the trade flows. For this purpose, we use the nonlinear ARDL
model proposed by Shin et al. (2014).

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The Effect of the Global Financial Crisis on the Asymmetric Relationship between Exchange Rate Volatility and
Trade Flows

Figure 1 Openness of the US economy- Imports and exports as a % of the GDP

18

16

14

12

10

2
60 65 70 75 80 85 90 95 00 05 10 15

EXPORTS IMPORTS
Source: WDI and Author’s calculation

The global financial crisis also brings significant changes among all assets which include the foreign
exchange market as well (McKenzie, 2009; Melvin and Taylor, 2009). Researchers argue that
Global financial crisis (2008) is even more severe than the great depression that happened in the
1930s since it has vulnerable effects on the governments for policy intervention and social and
economic costs globally (Fratzscher, 2009, 2012). Moreover, Fosten (2012) also indicates that the
asymmetric relationship among the prices changes as a result of the global financial crisis. Rocher
(2017) also shows that economic agents become more nervous and scared during the crisis period.
This study, therefore, divides the data into the pre and the post-crisis period and examines whether
the asymmetric relationship between exchange rate volatility and trade flows changes as a result of
the global financial crisis. For examining the asymmetric relationship we use nonlinear ARDL model
proposed by Shin et. al (2014) both on the pre and post-crisis period data.
Rest of the paper is organized as follows. Section two presents data and methodology, section three
analysis and discusses the results and finally, section four concludes the paper.

2. Data and Methodology

2.1. Data
This study mainly examines whether the asymmetric relationship between exchange rate volatility
and trade flows changes as a result of the global financial crisis. Trade flows are measured by US
exports (imports) to (from) developing countries such as Mexico, Brazil, South Africa, and India. These
developing countries are selected since these are the major trading partners of the US. The data for
exports and imports is taken from the Direction of Trade Statistics (DOTS) an IMF database. Following
Bahmani-Oskooee and Aftab, (2017) we model exports as a function of real income, measured by
industrial production index, of developing country i, US real exchange rate and exchange rate volatility.
Moreover, we model US imports as a function of US real income, US real exchange rate, and exchange
rate volatility. Data for nominal exchange rate (NEX), consumer price index (CPI) and industrial
production index (IPI) is obtained from international financial statistics (IFS). We use NEX and CPI to
measure the real exchange rate (REX). The nominal exchange rate is defined as a number of foreign
currencies per unit of the US dollar. Moreover, the real exchange rate is measured as follows:

3
 Bisharat Hussain Chang, Niaz Ahmed Bhutto, Farhan Ahmed, Zahida Abro, Nadia Anjum

𝑁𝐸𝑋𝑡𝑖 ∗ 𝐶𝑃𝐼𝑡𝑈𝑆
𝑅𝐸𝑋𝑡𝑖 = (1)
𝐶𝑃𝐼𝑡𝑖
Where 𝑁𝐸𝑋𝑡𝑖 is the bilateral nominal exchange rate of the US with developing country i, at time t.
𝐶𝑃𝐼𝑡𝑈𝑆 and 𝐶𝑃𝐼𝑡𝑖 respectively indicate the consumer price index for the US and developing country i, at
time t. Moreover, we obtain the exchange rate volatility series by using GARCH (1,1) model.
Since we examine whether the asymmetric relationship changes as a result of the global financial
crisis, therefore, we use pre and post-crisis period data. The pre-crisis period consists of data from
January 1986 to August 2008 whereas the post-crisis crisis period consists of data from September
2008 to January 2018. Following Berger and Uddin (2016), and You et al. (2017), we select September
2008 as the starting point of the crisis period because Lehman Brothers was collapsed in this date.

2.2. Methodology
In the traditional models increase in the independent variable affects the dependent variable in the
same way as for a decrease in the independent variable. The traditional ARDL model for export and
import where increase and decrease in the exchange rate volatility similarly affect the dependent
variable is given as below:
𝑛1 𝑛2 𝑛3
𝑈𝑆 𝑈𝑆 𝑖 𝑖
∆𝐿𝑛𝑋𝑖,𝑡 = 𝛽0 + ∑ 𝛽1,𝑗 ∆𝐿𝑛𝑋𝑡−𝑗 + ∑ 𝛽2,𝑗 ∆𝐿𝑛𝐼𝑃𝑡−𝑗 + ∑ 𝛽3,𝑗 ∆𝐿𝑛𝑅𝐸𝑋𝑡−𝑗
𝑗=1 𝑗=0 𝑗=0
𝑛4 (2)
𝑖 𝑈𝑆 𝑖 𝑖 𝑖
+ ∑ 𝛽4,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗 + 𝜌1 𝐿𝑛𝑋𝑡−1 + 𝜌2 𝐿𝑛𝐼𝑃𝑡−1 + 𝜌3 𝐿𝑛𝑅𝐸𝑋𝑡−1 + 𝜌4 𝐿𝑛𝑉𝑡−1
𝑗=0
+ 𝑒𝑡
𝑛5 𝑛6 𝑛7
𝑈𝑆 𝑈𝑆 𝑈𝑆 𝑖
∆𝐿𝑛𝑀𝑖,𝑡 = 𝑎0 + ∑ 𝑎1,𝑗 ∆𝐿𝑛𝑀𝑡−𝑗 + ∑ 𝑎2,𝑗 ∆𝐿𝑛𝐼𝑃𝑡−𝑗 + ∑ 𝑎3,𝑗 ∆𝐿𝑛𝑅𝐸𝑋𝑡−𝑗
𝑗=1 𝑗=0 𝑗=0
𝑛8 (3)
𝑖 𝑈𝑆 𝑈𝑆 𝑖 𝑖
+ ∑ 𝑎4,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗 + 𝜃1 𝐿𝑛𝑀𝑡−1 + 𝜃2 𝐿𝑛𝐼𝑃𝑡−1 + 𝜃3 𝐿𝑛𝑅𝐸𝑋𝑡−1 + 𝜃4 𝐿𝑛𝑉𝑡−1
𝑗=0
+ 𝑒𝑡
Where the equation 2 represents the ARDL model for exports and equation 3 represents the ARDL
𝑈𝑆 𝑈𝑆
model for imports. 𝑋𝑖,𝑡 represents the US exports to country i at time t and 𝑀𝑖,𝑡 represents the US
𝑈𝑆 𝑖
imports from country i at time t. 𝐼𝑃𝑡 , and 𝐿𝑛𝐼𝑃𝑡 respectively indicate the US domestic income and
foreign income for country i. Finally, 𝑅𝐸𝑋𝑡𝑖 and 𝐿𝑛𝑉𝑡𝑖 represent real exchange rate and exchange rate
volatility respectively1. In order to take into account the asymmetric effect, Shin et al. (2014) proposed
nonlinear ARDL. In this model, we divide the exchange rate volatility series into a partial sum of positive
and negative changes as mentioned below:
𝑡 𝑡

𝑙𝑛𝑉𝑡𝑖,+ = ∑ ∆𝑙𝑛𝑉𝑗𝑖,+ = ∑ max(∆𝑙𝑛𝑉𝑗𝑖 , 0) (4)

𝑗=1 𝑗=1

𝑡 𝑡

𝑙𝑛𝑉𝑡𝑖,− = ∑ ∆𝑙𝑛𝑉𝑗𝑖,− = ∑ min(∆𝑙𝑛𝑉𝑗𝑖 , 0) (5)

𝑗=1 𝑗=1

1
For further details about ARDL and nonlinear ARDL models please see Bhutto and Chang (2019), Chang and
Rajput (2018), Chang et al. (2018) and Anjum et al. (2017)

4
The Effect of the Global Financial Crisis on the Asymmetric Relationship between Exchange Rate Volatility and
Trade Flows

Next, we proceed further by replacing 𝑙𝑛𝑉𝑡𝑖 with 𝑙𝑛𝑉𝑡𝑖,+ and 𝑙𝑛𝑉𝑡𝑖,− in equation (2) and (3) and get
the following models:
𝑛1 𝑛2 𝑛3 𝑛4
𝑈𝑆 𝑈𝑆 𝑖 𝑖 𝑖,+
∆𝐿𝑛𝑋𝑖,𝑡 = 𝑐1 + ∑ 𝑐2,𝑗 ∆𝐿𝑛𝑋𝑡−𝑗 + ∑ 𝑐3,𝑗 ∆𝐿𝑛𝐼𝑃𝑡−𝑗 + ∑ 𝑐4,𝑗 ∆𝐿𝑛𝑅𝐸𝑋𝑡−𝑗 + ∑ 𝑐5,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗
𝑗=1 𝑗=0 𝑗=0 𝑗=0
𝑛5
(6)
𝑖,− 𝑈𝑆 𝑖 𝑖 𝑖,+
+ ∑ 𝑐6,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗 + 𝑐7 𝐿𝑛𝑋𝑡−1 + 𝑐8 𝐿𝑛𝐼𝑃𝑡−1 + 𝑐9 𝐿𝑛𝑅𝐸𝑋𝑡−1 + 𝑐10 𝐿𝑛𝑉𝑡−1
𝑗=0
𝑖,−
+ 𝑐11 𝐿𝑛𝑉𝑡−1 + 𝑒𝑡
𝑛6 𝑛7 𝑛8
𝑈𝑆 𝑈𝑆 𝑈𝑆 𝑖
∆𝐿𝑛𝑀𝑖,𝑡 = 𝑑1 + ∑ 𝑑2,𝑗 ∆𝐿𝑛𝑀𝑡−𝑗 + ∑ 𝑑3,𝑗 ∆𝐿𝑛𝐼𝑃𝑡−𝑗 + ∑ 𝑑4,𝑗 ∆𝐿𝑛𝑅𝐸𝑋𝑡−𝑗
𝑗=1 𝑗=0 𝑗=0
𝑛9 𝑛10
(7)
𝑖,+ 𝑖,− 𝑈𝑆 𝑈𝑆
+ ∑ 𝑑5,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗 + ∑ 𝑑6,𝑗 ∆𝐿𝑛𝑉𝑡−𝑗 + 𝑑7 𝐿𝑛𝑀𝑡−1 + 𝑑8 𝐿𝑛𝐼𝑃𝑡−1
𝑗=0 𝑗=0
𝑖 𝑖,+ 𝑖,−
+ 𝑑9 𝐿𝑛𝑅𝐸𝑋𝑡−1 + 𝑑10 𝐿𝑛𝑉𝑡−1 + 𝑑11 𝐿𝑛𝑉𝑡−1 + 𝑒𝑡
In specification (6) and (7) we can test the long run and short run asymmetry using the Wald test
where the null hypothesis is that there is symmetry. For specification (6) the null hypothesis for short-
run symmetry is ∑𝑛4 𝑛5 𝑛4
𝑗=0 𝑐5,𝑗 = ∑𝑗=0 𝑐6,𝑗 where is for specification (7) the null hypothesis is ∑𝑗=0 𝑑5,𝑗 =
∑𝑛5
𝑗=0 𝑑6,𝑗 . Likewise, the null hypothesis for long run symmetry is tested through 𝑐10 = 𝑐11 and 𝑑10 =
𝑑11 for specification (6) and (7) respectively. The positive and negative long run coefficient for
specification (6) are calculated through β1 = −𝑐10 /𝑐7 and β2 = −𝑐11 /𝑐7 respectively whereas for
specification (7) they are calculated by β1 = −𝑑10 /𝑑7 and β2 = −𝑑11 /𝑑7 respectively.

3. Results discussion and analysis

The objective of this study is to examine whether the asymmetric relationship between exchange
rate volatility and trade flows changes as a result of the global financial crisis. For this purpose, we use
a nonlinear ARDL model during both the pre and the post-crisis periods. The advantage of linear and
nonlinear ARDL models is that they can be used regardless of the variables are integrated of order zero
or one. Since most of the economic variables are either integrated of order zero or one, therefore, we
do not calculate the order of integration of the variables. Like the ARDL model, nonlinear ARDL model
also requires that there must exist long run co-integration in order to interpret the long run coefficients
to be valid. Therefore, in Table 1, we use the bounds for exchange rate volatility and trade flows by
using the pre-crisis period data. The bounds test (see panel A) indicates that long run co-integration
exists for the exchange rate volatility impact on the US exports to all developing countries. On the
other hand, co-integration exists for exchange rate volatility impact on the US imports from Mexico
and South Africa only.
Table 2 presents the short run and long run relationship between exchange rate volatility and US
exports to developing countries by using the pre-crisis period data. Since our main variable of interest
is exchange rate volatility, therefore, we discuss the results related to the exchange rate volatility only.
In the short-run results indicate that there exists an asymmetric relationship between exchange rate
volatility and US exports in the context of India and Mexico only. In the context of India, the coefficient
is significant for partial sum of positive changes at lag three (Δlnv+(-3)) only whereas for Mexico the
coefficient is significant for partial sum of negative changes (Δlnv-) only. Panel B presents results in the
long run. These results indicate that there exists an asymmetric relationship between exchange rate
volatility and the US exports to Mexico only since for Mexico the coefficient is significant for the partial
sum of positive changes (Lnv+) whereas this coefficient is insignificant for the partial sum of negative

5
 Bisharat Hussain Chang, Niaz Ahmed Bhutto, Farhan Ahmed, Zahida Abro, Nadia Anjum

changes (Lnv-). For other countries, we can say that there is a symmetric effect because both the
coefficients (Lnv- and Lnv+) are either significant or both are insignificant.
Table 1. Bounds test for exchange rate volatility and trade flows: pre-crisis period
Brazil India Mexico South Africa
Panel A: Exchange rate volatility and the US exports to developing countries
F-Statistic 3.59** 6.49*** 6.96*** 5.37***
Panel B: Exchange rate volatility and the US imports from developing countries
F-Statistic 2.23 2.43 6.09*** 4.65***
Panel C: Bounds critical values
99% 95% 90%
I(0) I(1) I(0) I(1) I(0) I(1)
3.29 4.37 2.56 3.49 2.2 3.09

Table 2. Exchange rate volatility and the US exports to developing countries: pre-crisis period
Brazil India Mexico South Africa
Panel A: Short-run coefficients
Δlnexport(-1) -0.48(-7.77***) -0.31(-4.5***) -0.36(-5.2***) -0.51(-7.31***)

Δlnexport(-2) -0.22(-3.54***) -0.22(-3.7***) -0.07(-0.94) -0.29(-5.15***)

Δlnexport(-3) -0.09(-1.66*) -0.14(-2.44**)
Δlnv+ -0.03(-0.98)
Δlnv+(-1) 0.02(0.69)
Δlnv+(-2) -0.03(-1.17)
Δlnv+(-3) 0.07(3.12***)
Δlnv- -0.15(-1.96*)
Δlnrex 0.06(0.69)
Δlnipi 0.29(2.37**) 0.69(3.38***) 1.35(11.39***)
Δlnipi(-1) 0.48(3.71***) -0.65(-2.8***) 0.41(2.36**)
Δlnipi(-2) 0.41(3.21***) -0.60(-2.6***) 0.17(1.03)
Δlnipi(-3) -0.63(-3.1***) 0.37(2.69***)
Panel B: Long-run coefficients
Lnv+ -0.02(-0.18) -0.21(-2.6***) 0.11(2.64***) -0.17(-2.72***)
-
Lnv -0.05(-0.32) -0.23(-2.7***) 0.02(0.58) -0.21(-3.53***)
Lnrex -1.06(-2.89***) -1.66(-4.7***) -0.74(-6.4***) -0.001(-0.03)
Lnipi 2.87(2.68***) 1.93(11.04***) 2.15(8.07***) 0.98(1.14)
Panel C: Diagnostics
Reset 0.60 1.94 0.84 0.59
LM 0.86 0.24 1.57 0.54
CUSUM S S S S
CUSUMQ U S S S
ECM -0.10*** -0.29*** -0.33*** -0.29***
Adj. r2 0.31 0.36 0.56 0.43
Table 3 presents the pre-crisis period results related to the exchange rate volatility and the US
imports. In Panel A, the coefficients for exchange rate volatility are not present since the AIC criterion
automatically drops the most insignificant coefficients for selecting the optimal model. It, therefore,
indicates that neither positive changes in the exchange rate volatility nor negative changes in the
exchange rate volatility significantly affects the US imports. We can, therefore, assume a symmetric
relationship in the short run. Moreover, in the long run, only positive changes in the exchange rate
volatility significantly affect the US imports from Brazil. Therefore, for this country, we can say that

6
The Effect of the Global Financial Crisis on the Asymmetric Relationship between Exchange Rate Volatility and
Trade Flows

there is an asymmetric relationship whereas for other countries there is a symmetric relationship in
the long run.
Table 3. Exchange rate volatility and the US imports: pre-crisis period
Brazil India Mexico South Africa
Panel A: Short-run coefficients
Δlnimport(-1) -0.51(-7.97***) -0.28(-4.0***) -0.39(-5.3***) -0.50(-7.47***)

Δlnimport(-2) -0.19(-3.11***) -0.24(-3.6***) -0.18(-2.5***) -0.24(-4.11***)

Δlnimport(-3) -0.12(-1.96*) -0.12(-2.0**)
Δlnrex 0.19(1.51)
Panel B: Long-run coefficients
Lnv+ 0.04(0.34) 0.04(0.35) 0.14(2.44**) -0.03(-0.37)
Lnv- 0.001(0.04) 0.04(0.37) 0.08(1.35) -0.09(-1.22)
Lnrex 0.36(1.49) -0.07(-0.16) -0.44(-2.9***) 0.33(0.92)
Lnipi_us 0.54(0.74) 3.67(7.02***) 2.96(4.91***) 0.17(0.23)
Panel C: Diagnostics
Reset 5.32*** 12.04*** 0.82 2.91*
LM 0.01 34.01*** 5.88*** 0.28
CUSUM U U S S
CUSUMQ S U S S
ECM -0.12*** -0.16*** -0.26*** -0.25***
Adj. r2 0.29 0.18 0.30 0.38
Table 4. Bounds test for exchange rate volatility and trade flows: post-crisis period
Brazil India Mexico South Africa
Panel A: Exchange rate volatility and the US exports to developing countries
F-Statistic 5.21*** 7.17*** 3.14 3.69**
Panel B: Exchange rate volatility and the US imports from developing countries
F-Statistic 13.37*** 6.07*** 5.81*** 16.63***
Panel C: Bounds critical values
99% 95% 90%
I(0) I(1) I(0) I(1) I(0) I(1)
3.60 4.78 2.69 3.69 2.30 3.22
Table 4 presents the bounds test results by using the post-crisis period data. Bounds test results
indicate that long run co-integration exists for both exports and imports models and for all countries
except the US exports to Mexico. Table 5 presents the short run and long run results related to the
exchange rate volatility impact on the US exports by using the post-crisis period data. In the short run,
the asymmetric relationship is found in the context of Mexico and India and these results are similar
to the pre-crisis period results. Moreover, in the long run, there is a symmetric effect of exchange rate
volatility on the US exports to all sample countries. On the contrary, the pre-crisis period results
present in Table 2 indicated the asymmetric effect of exchange rate volatility on the US exports to
Mexico. It, therefore, indicates that for Mexico the results have been changed as a result of the
financial crisis whereas for other countries results remain the same for exchange rate volatility and the
exports relationship.
Finally, Table 6 presents the results related to the exchange rate volatility and US imports by using
the post-crisis period data. In the short run, findings indicate asymmetric relationship for Brazil and
Mexico. These results are different from the pre-crisis period results in a way that during the pre-crisis
period (See Table 3, Panel A), there is a symmetric effect for all sample countries in the short run.
Moreover, in the post-crisis period, results indicate the symmetric effect of exchange rate volatility on

7
 Bisharat Hussain Chang, Niaz Ahmed Bhutto, Farhan Ahmed, Zahida Abro, Nadia Anjum

the US imports from all sample countries in the long run. However, these results indicate the
asymmetric effect for US imports from Mexico when the pre-crisis period sample is used.
Table 5. Exchange rate volatility and the US exports: post-crisis period
Brazil India Mexico South Africa
Panel A: Short-run coefficients
Δlnexport(-1) -0.47(-5.43***) -0.15(-1.64) -0.23(-1.96**) -0.27(-2.91***)

Δlnexport(-2) -0.21(-2.54***) -0.11(-1.1)

Δlnexport(-3) 0.10(1.86*)
Δlnv+ 0.79(1.79*) 0.04(0.90)
Δlnv+(-1) -0.50(-1.12) 0.04(1.21)
Δlnv+(-2) -1.08(-2.6***) 0.01(0.84)
Δlnv+(-3) 0.03(3.07***) 0.02(3.22***)
Δlnv- 0.85(1.84*) -0.01(-0.21)
Δlnv-(-1) -0.51(-1.11) 0.05(1.37)
Δlnv-(-2) -1.14(-2.6***)
Δlnrex -0.06(-0.42) -0.03(-0.35) -0.17(-0.43)
Δlnrex(-1) -0.21(-1.7*) 0.75(1.89*)
Δlnipi 0.58(4.43***) -0.13(-0.59) 1.85(13.26***)
Δlnipi(-1) 0.22(1.52) -1.33(-4.3***) -0.02(-0.02)
Δlnipi(-2) 0.26(1.87*) -1.21(-4.9***) -0.34(-1.52)
Panel B: Long-run coefficients
Lnv+ 0.09(0.83) 0.89(1.03) -0.14(-0.71) 0.06(0.72)
-
Lnv 0.02(0.22) 0.94(1.04) -0.32(-1.47) 0.03(0.5)
Lnrex -1.37(-3.74***) -0.22(-0.41) -0.67(-2.7***) -1.33(-2.68***)
Lnipi 0.87(1.77*) 0.75(1.26) -1.27(-1.23) 0.12(0.21)
Panel C: Diagnostics
Reset 0.19 0.53 3.48*** 2.93***
LM 1.87 1.14 3.86** 1.22
CUSUM S S S S
CUSUMQ S S S U
ECM -0.27*** -0.49*** -0.21*** -0.42***
Adj. r2 0.49 0.48 0.83 0.34
Insert Table 6 here
These findings overall indicate that the financial crisis does have an effect on the asymmetric
relationship between exchange rate volatility and trade flows. However, these results differ for each
country as well as for exports and imports model. From these findings, it can be concluded that the
effect of the global financial crisis must be considered while formulating policies related to the
exchange rate volatility and trade flows. Moreover, different policies may be devised for each country
as well as related to the exports and imports models.

8
The Effect of the Global Financial Crisis on the Asymmetric Relationship between Exchange Rate Volatility and
Trade Flows

Table 6. Exchange rate volatility and the US imports: post-crisis period

Brazil India Mexico South Africa
Panel A: Short-run coefficients
Δlnimport(-1) 0.04(0.31)

Δlnimport(-2) 0.18(1.68*)
Δlnimport(-3) 0.20(2.19**)
Δlnv+ 0.03(0.87) 0.38(0.88) 0.01(0.22)
Δlnv+(-1) -.001(-2.69***) -0.49(-1.07) 0.07(1.28)
+
Δlnv (-2) 0.59(1.47) 0.10(2.32**)
Δlnv+(-3) 0.08(1.88*)
Δlnv- 0.02(0.38) 0.17(0.36) -0.05(-1.03)
-
Δlnv (-1) -0.50(-1.05) 0.02(2.15**)
Δlnv-(-2) -0.02(-2.07**)
Δlnrex -0.09(-0.29) -0.19(-0.37) -0.05(-0.16)
Δlnrex(-1) 0.73(2.91***) 0.43(0.95) 0.31(0.82)
Δlnrex(-2) 1.01(2.22**) 0.77(2.00**)
Δlnipi_us -2.98(1.55) 1.91(1.54)
Δlnipi_us(-1) 2.18(2.04**)
Panel B: Long-run coefficients
Lnv+ 0.21(2.87***) 0.07(0.12) -0.05(-0.49) -0.02(-0.56)
Lnv- 0.17(2.49**) -0.26(-0.38) -0.13(-1.13) -0.03(0.95)
Lnrex -1.09(-6.47***) -0.89(-2.5**) -0.16(-0.75) -0.97(-5.05***)
Lnipi_us 1.24(2.69***) 2.11(2.18) 1.80(3.27***) 1.55(2.16**)
Panel C: Diagnostics
Reset 2.50 1.83* 4.73*** 1.32
LM 0.83 0.68 1.89 0.61
CUSUM S S S S
CUSUMQ S S S S
ECM -0.70*** -0.72*** -0.47*** -0.97***
2
Adj. r 0.42 0.39 0.33 0.52

4. Conclusion

Since 1973 when the Bretton Woods fixed exchange rate collapsed, various studies have been
examining the relationship between exchange rate volatility and trade flows. Recent literature has
however shifted to examining whether the relationship between exchange rate volatility and trade
flows is symmetric or asymmetric (Hatemi-J, 2012, Kalu, 2017). These studies have, however, also not
come to the conclusion related to the asymmetry between exchange rate volatility and trade flows.
Moreover, researchers also argue that the asymmetric relationship between economic and financial
variables changes as a result of the global financial crisis (Fosten, 2012).
This study examines the asymmetric relationship between exchange rate volatility and trade flows
between the US and its trading partners from developing countries-Brazil, Mexico, India, and South
Africa. Moreover, it examines whether the asymmetric relationship among the underlying variables
changes as a result of the global financial crisis. For this purpose, we use a nonlinear ARDL model
proposed by Shin et. al (2014) by using the pre and post-crisis period data. The pre-crisis period covers
the data from January 1986 to August 2008 and the post-crisis period covers the data from September
2008 to January 2018.
Findings of the study indicate that the relationship between exchange rate volatility and trade flows
changes as a result of the global financial crisis. However, these changes are country-specific and
depend on exports and imports. For example, in the long run, a pre-crisis period denoted the

9
 Bisharat Hussain Chang, Niaz Ahmed Bhutto, Farhan Ahmed, Zahida Abro, Nadia Anjum

symmetric relationship between exchange rate volatility and the US exports to all sample countries
whereas the post-crisis denoted the asymmetric relationship in the context of Mexico.
Researchers and policymakers may, therefore, need to consider which country the relationship
changes as a result of the global financial crisis. They, therefore, need to set different policies for
different countries. Ignoring the financial in those countries may lead to spurious results for a particular
country where the relationship among the underlying variables changes as a result of the global
financial crisis.

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