Risk and Return Spillovers Among the G10 Currencies

51 Pages Posted: 12 Feb 2016

See all articles by Matthew Greenwood-Nimmo

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research

Barry Rafferty

University of Melbourne

Date Written: February 1, 2016

Abstract

We study spillovers among daily returns and innovations in option-implied risk-neutral volatility and skewness of the G10 currencies. An empirical network model uncovers substantial time variation in the interaction of risk measures and returns, both within and between currencies. We find that aggregate spillover intensity is countercyclical with respect to the federal funds rate and increases in periods of financial stress. During these times, volatility spillovers and especially skewness spillovers between currencies increase, reflecting greater systematic risk. Likewise, linkages between returns and risk measures strengthen in times of stress, with returns becoming more sensitive to risk measures and vice versa.

Keywords: Foreign exchange markets, risk-neutral volatility, risk-neutral skewness, spillovers, coordinated crash risk

JEL Classification: C58, F31, G01, G15

Suggested Citation

Greenwood-Nimmo, Matthew and Nguyen, Viet Hoang and Rafferty, Barry, Risk and Return Spillovers Among the G10 Currencies (February 1, 2016). Melbourne Institute Working Paper No. 4/16. Available at SSRN: https://ssrn.com/abstract=2730957 or http://dx.doi.org/10.2139/ssrn.2730957

Matthew Greenwood-Nimmo

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Barry Rafferty (Contact Author)

University of Melbourne ( email )

Melbourne, 3010
Australia

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