FX Market Returns and Their Relationship to Investor Fear

International Review of Finance, Forthcoming

13 Pages Posted: 13 Jan 2016 Last revised: 26 Feb 2016

Lee A. Smales

Curtin University - School of Economics and Finance; Curtin University - Graduate School of Business

Jardee Kininmonth

Curtin University

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2015

Abstract

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.

Keywords: VIX, FX market, Carry trade, GFC

JEL Classification: F31, G10, G15

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

Lee A. Smales (Contact Author)

Curtin University - School of Economics and Finance ( email )

GPO Box U 1987
Perth, Western Australia 6845
Australia

Curtin University - Graduate School of Business ( email )

Bentley WA 6102
Australia

Jardee Kininmonth

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

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