FX Market Returns and Their Relationship to Investor Fear

Lee A. Smales

Curtin University - School of Economics and Finance

Jardee Kininmonth

Curtin University

December 1, 2015

International Review of Finance, Forthcoming

This note examines the relationship between changes in levels of investor fear (measured by VIX) and FX market returns. Our empirical results indicate a negative relationship between daily returns on high-interest rate (investing) currencies and changes in VIX, while the association is positive for low-interest rate (funding) currencies. That is, investing (funding) currencies tend to depreciate (appreciate) when investor fear increases. A sequential breakpoint test identifies a significant change in this relationship in the period following the 2008 collapse of Lehman Brothers, and another in 2012 following the European sovereign debt crisis. During this crisis period, currency returns are much more sensitive to changes in investor fear, and this is particularly so for funding currencies which are perceived to be a safe-haven.

Number of Pages in PDF File: 13

Keywords: VIX, FX market, Carry trade, GFC

JEL Classification: F31, G10, G15

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Date posted: January 13, 2016 ; Last revised: February 26, 2016

Suggested Citation

Smales, Lee A. and Kininmonth, Jardee, FX Market Returns and Their Relationship to Investor Fear (December 1, 2015). International Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2712558 or http://dx.doi.org/10.2139/ssrn.2712558

Contact Information

Lee A. Smales (Contact Author)
Curtin University - School of Economics and Finance ( email )
GPO Box U 1987
Perth, Western Australia 6845
Jardee Kininmonth
Curtin University ( email )
Kent Street
Perth, WA WA 6102
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