Asymmetric Impact of Exchange Rate Volatility on Commodity Trade Between Pakistan and China

Abstract

China is the largest trading partner of Pakistan. Therefore, it is very important to consider the trade flows between Pakistan and China and their response to rupee–yuan volatility. Previous research assumed that response of trade flows to measure of volatility is symmetric. In this study, our basic objective is to check whether the trade flows respond to volatility in a symmetric or asymmetric manner. Annual data over the period 1980–2018 for 14 Pakistani industries exporting to and 34 industries importing from China are analyzed. We find short-run asymmetric effects of exchange rate volatility in almost all industries that last into long-run asymmetric effects in 40–50 per cent of industries. Non-linear models yielded more significant effects of volatility than the traditional linear models.