Exploring the Time-varying Connectedness and Contagion Effects among Exchange Rates of BRICS, Energy Commodities, and Volatilities

Abstract

This paper investigates the total and net directional connectedness of the energy market and currency market amid volatilities (local and international) in BRICS setting for the period May 7, 2012 to March 31, 2022. The Time‐varying parameter Vector Autoregression connectedness approach is specifically employed. We reveal that the average value of the total connectedness index is 46.91%, for the specific network of energy commodities, currency rates, and volatilities. Also, from the averaged dynamic connectedness, the global energy commodity index demonstrated the most transmitter of shocks. Conversely, BRICS currency markets (except for Brazilian Rubble) and most implied energy volatilities and realised exchange rate volatilities were net receivers of shocks. Moreover, the total connectivity indices were observed to vary substantially with strong susceptibility to crisis periods, especially, the COVID‐19 pandemic. We advocate that most volatilities were consistent net transmitters across time as indicated by the net directional connectedness. The findings imply that in a network of energy commodities, exchange rate, and volatilities, risk minimisation is enhanced to boost investors’ confidence across time.