Risk, Uncertainty and Exchange Rate Behavior in South Africa

Abstract

This study investigates the role of market sentiment and foreign policy uncertainty in explaining rand price fluctuations using monthly data from 1995M2 to 2017M8. Empirical results from the pair copula analysis indicate no dependence between foreign policy uncertainties and rand returns when market sentiment is controlled for. Furthermore, change in market sentiment seems to drive fluctuations in rand exchange rate suggesting that exchange rate behavior is indeed unpredictable as market sentiment captures both risk and uncertainty. These results are robust across pre- and post-recent financial crisis periods; hence confirming the ability of pair copula to model extreme events.