Is there a price bubble in the exchange rates of the developing countries? The case of BRICS and Turkey.
| Autor | Yildirim, Hakan |
Nomenclature ADF Augmented Dickey-Fuller BRL Brazilian Real ARDL Auto-regressive BTC Bitcoin (Decentralized Distributed Lag digital currency) BEKK Baba, Engle, Kraft and Kroner (1990) model CNY Renminbi (Official INR currency of the People's JPY Republic of China) MXN CUSUM Cumulative Sum RTADF BRICS Brazil, Russia, India, China, and South Africa RUB DEM Deutsche Mark SADF ETH Ethereum GARCH Generalized TRY Autoregressive Conditional US Heteroskedasticity USD GBP Great Britain Pound XRP GSADF Generalized Supremum Augmented Dickey-Fuller ZAR Nomenclature ADF ARDL BEKK CNY Indian Rupee Japanese Yen Mexican Peso CUSUM Right Tail Augmented BRICS Dickey-Fuller Russian Rubble/Rouble DEM Supremum Augmented ETH Dickey-Fuller GARCH Turkish Liras United States of America United States Dollars GBP Digital asset/currency GSADF created by Ripple South African Rand 1. Introduction
Just like the production of essential goods and services are subject to human needs, the prices of essential commodities are largely associated with the dynamics of their supply and demand. In essence, the availability and/or prices of the essential goods and services are associated with the dynamics related to economic uncertainties, natural events or disasters and market-related factors (Balcilar et al., 2016; Alola et al., 2019; Akadiri et al., 2020; Onifade et al., 2020; Akdag et al., 2021). Moreover, the monetary policies applied to one of the currency pairs or the macroeconomic consequences that may affect the currency, thus shaping the price trend of the currency pair. Most of the time, speculative balloons can lead to high pricing of commodities, securities and other financial items, thus causing the relevant financial value to exceed the basic value. In essence, this causes markets and investors to react faster than rising prices among other reasons. As a result of the extinction of the bubbles in question, it then prompts a rise in price situation against the markets and investors.
To date, world history has witnessed a handful of financial crises and the price bubbles that caused these crises (Kindleberger and Aliber, 2005). Chronologically, the most important price bubbles in the history of finance include the: Tulip Mania (1,636), Mississippi Bubble (1720), Great Depression (1929), Internet Bubble (2001), the Global Financial Crisis (GFC) of 2008-2010 and the Real Estate Bubble and Mortgage Crisis. For instance, the Tulip Mania is one of the most important examples of the price bubble as it is the first manipulative movement in history. In the European region, Tulip Mania especially influenced the Netherlands in 1,623, when the price of Tulip bulbs rose to 1,000 guineas, average annual wage was 150 guinea. Additionally, in February 1,637, resulting of the tulip bulb in Amsterdam, the price of a bourgeois house could be recorded to be about 5,200 guineas (Mazgir, 2007).
As a follow-up to the Tulip Mania, everyone was affected by the tulip bulbs, which led to a sharp rise in prices at the beginning of a great mania. Thus, because of the extinction of the bubble in prices, it reportedly caused a crisis that will continue to be remembered throughout Europe. In history, another important financial crisis caused by the price bubble is the 2008 GFC (Alola, 2020; Alola and Uzuner, 2020; Balcilar et al., 2020). Price bubbles, which became a very important issue in the aftermath of the 2008 global crisis, have become a popular research topic in the financial and academic circles. Especially the bubbles in housing prices and the extinction of these bubbles were seen as the main cause of the crisis. In the financial literature, firstly, the price bubbles in housing prices were emphasized, followed by the existence of the price bubble for the securities' markets, cryptocurrencies, commodities and many different financial assets.
In the study by Phillips and Yu (2011), it opined that the bubbles are expressed as an increasing situation, moving away from the rapid and real values formed in asset prices. In the literature, many different financial and investment instruments related to the price bubbles are being investigated. While the study of price bubbles has been conducted for several economies across the globe including Evans (1986) for the United States of America (US) and the United Kingdom (UK), Wu (1995) for the US, UK, Germany and Japan, Case and Shiller (2003) for the US, Fernandez-Kranz and Hon (2006) for Spain, Cheung et al. (2015) for digital or cryptocurrency, Kristoufek (2015) for digital or cryptocurrency, Landgraf (2016) in asset prices, Shi (2017) for asset markets, Fabozzi and Xiao (2019) for the US real estate market and Narta et al (2018) in the Singaporean and Indonesian stock markets; the case of Turkey has been considered in the works of Altay (2008), Bozoklu and Zeren (2013), Afsar and Dogan (2018), and Uzuner et al (2017). In regard to the Brazil, Russia, India, China, and South Africa (BRICS) countries, the banking sector indicators such as the size of the financial intermediaries, domestic credit to the private sector and credit to deposit ratio are vital to the economic stability of the bloc countries (Guru and Yadav, 2019).
While the efforts to test the existence of price bubbles in financial assets increased rapidly (Deviren etal, 2014), different models are being employed to test the asset. For variance tests such as LeRoy and Porter (1981) and Shiller (1981), the first of the models aiming to detect price balloons, were used. Thereafter, other approaches such as Diba and Grossman (1988) and Hamilton and Whiteman (1985) have been explored. In the 2000s, Chow and cumulative sum (CUSUM) tests applied in Homm and Breitung's (2012) study became popular. Tests such as SADF and GASDF, which were first shown in the Phillips et al (2011) study and developed by Phillips et al. (2015), are frequently mentioned in the price bubble test recently.
In this study, Supremum Augmented Dickey-Fuller (SADF) and Generalized Supremum Augmented Dickey-Fuller (GSADF) tests were applied to test the presence of price bubbles in BRICS member countries alongside Turkey while using the United States Dollar the indexed exchange rates. The group of countries: South Africa, India, Brazil, Russia and China, accounts for 40% of the world's population and accounts for 60% of the world's mineral reserves. The justification for examining the case of the BRICS economies is not limited to the fact that the BRICS's share of global output is forecasted at one-third by 2030 (or 45% of the world's gross domestic product (GDP) by about 2030 in price purchase parity term), the bloc occupies about 30% of the global territory, the BRICS accounts for about 17% of world trade and yielding about 4 trillion USD worth of foreign reserves (South African Government, 2021). This study considered the BRICS countries because they are commonly regarded as the world's leading developing economies. As originally noted by O'Neill (2001), the leading four (Brazil, India, Russia and China) are reportedly at a similar stage of advanced economic development. Thus, the current study considers Turkey alongside the BRICS economies because the significant improvement in the Turkish economy in recent years and that the Turkish Lira has remained one of the most vulnerable and volatile currencies among the leading developing states (E-7). Although, as one of the largest European Union (EU) neighbours, the Turkish currency reportedly lost almost half of its value in the last quarter of 2021, thereby causing, more devastating economic disruption.
Considering the importance of the BRICS economies as highlighted above, it is important to mention that the current study attempts to expand the financial literature for the BRICS countries from the following perspectives. As a first approach, the hypotheses for the existence of the price bubbles in the exchange rates of the BRICS and Turkish economies are tested. In a follow-up approach, the respective dates for the existing bubbles are also revealed, thus highlighting the severity of the occurrence of price bubbles and the associated events. By doing so, relevant policy recommendations for the examined economies are implied from the outlined results.
The remainder of this study is organized as follows: The next section presents the review of related literature that is presented in Section 2. Section 3 provides the data and methodological approach of the study. Subsequently, Section 4 focuses on the interpretation of empirical results. Finally, Section 5 renders the concluding remarks.
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