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
Date Written: December 1, 2015
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: Suggested Citation