Much Ado about global uncertainty: volatility transmission between US-China tension and African foreign exchange markets

Abstract

his study examines volatility transmission between the U.S.–China Tension (UCT) index and emerging African foreign exchange markets using the extended time-varying parameter vector autoregression (TVP-VAR) methodology. Monthly data from January 2005 to February 2024 capture evolving transmitter–receiver dynamics across five major African currencies, CNY/USD, global uncertainty indicators—geopolitical risk and trade policy uncertainty — and emerging market FX benchmarks. We provide the first application of the UCT index to African FX markets. Results show that African currencies respond more to volatility originating in other emerging markets than to more global (UCT index, GPR, TPU, or U.S./Chinese currency pair) shocks. ZAR/USD is the most exposed, confirming South Africa’s deeper integration into global trade and capital markets. Persistent net shocks receivers are linked to floating FX regimes. Peaks in spillovers coincide with the GFC, 2017–2018 U.S.–China trade tensions, and COVID-19/Brexit, while exchange rate regime changes in Nigeria and Ghana alter their transmitter–receiver roles. The results broaden our understanding of global financial transmission channels from geopolitical and geoeconomic tensions to African markets.