The Effects of the QE3 on the Foreign Exchange Markets of Developing Countries

The purpose of this paper is to examine the possible positive and negative effects of the QE3 on the foreign exchange markets of developing countries. The positive and negative effects are the enhanced market efficiency and volatility increase, respectively. To discover the efficiency, we use the S-NGARCH-M model and to check the volatility increase, we use the t-test applying the differences of volatility before and after the QE3. We have selected 8 developing countries, while countries such as Korea and Singapore are not developing countries in a strict sense. The empirical results show that the QE3 has increased the volatility for most of the studied countries, while some countries such as Korea, Indonesia and Thailand show insignificant volatility increase. To eliminate the country specific factors relating to the volatility, we formulate the equally weighted portfolio and apply the same test to the portfolio. The portfolio results show the significant volatility increase. By the same token, we can apply the S-NGARCH-M model to see the change in the degree of efficiency. We have significant empirical results to support the efficiency increase. Based on the empirical evidence, we provide the policy implications on the part of the developing countries.