A0678
Title: Supply chain disruptions and foreign exchange rate volatility
Authors: Mawuli Segnon - University of Münster (Germany) [presenting]
Abstract: The relationship between supply chain disruptions and foreign exchange (FX) rate volatility is investigated in fundamentals-based component frameworks. MIDAS volatility models are utilized to formalize FX rate volatility as a product of short- and long-run components. The long-run components are allowed to be driven by the monthly global supply chain pressure index (GSCPI) and the global economic condition (GECON) indicator, as well as some economic fundamentals such as inflation rates, policy rates, money differentials and industrial production. The dynamics governing the short-run component are modeled via GARCH, GJR, Markov switching multifractal (MSM) and factorial hidden Markov volatility (FHMV) processes. Empirical application results show a statistically significant positive relationship between supply chain disruptions and foreign exchange rate volatility for developed and developing countries. The predictive content of the global supply chain pressure index is evaluated based on up-to-date model comparison and backtesting tests. The results show a substantial improvement in the accuracy of out-of-sample forecasts of future FX volatility and value-at-risk for eleven developed and developing countries.
