Financial Crises, Exchange Rate Linkages and Uncovered Interest-Rate Parity: Evidence from G7 Markets

Posted: 13 Sep 2017

See all articles by Dimitris Kenourgios

Dimitris Kenourgios

National and Kapodistrian University of Athens - Department of Economics

Dimitrios I. Dimitriou

National and Kapodistrian University of Athens; University of Ioannina - Department of Economics

Theodore Simos

University of Ioannina - Department of Economics

Date Written: September 11, 2017

Abstract

This paper examines the dynamic linkages among major exchange rates during the Global Financial Crisis and Eurozone Sovereign Debt Crisis. We extend the previous literature on volatility spillover linkages among the currencies by taking into account the uncovered interest-rate parity hypothesis for 2004–2015. The results indicate that the Canadian Dollar and Great British Pound were affected mainly by the US Dollar across the two crises due to strong financial and economic ties among the three economies, while the Japanese Yen shows evidence of a safe-haven currency. We also provide evidence of varying vulnerability of currencies to both crises, implying increased portfolio diversification benefits, since holding a portfolio with diverse currencies is less subject to systematic risk. These results show that the policy makers need to adopt a stricter form of monetary policy coordination among central banks, since the different vulnerability of currencies across turbulent periods reveals possible non-cooperative monetary policies.

Keywords: Exchange rates, Uncovered interest-rate parity, Contagion, Financial crises, Dynamic conditional correlation

JEL Classification: C50, F31, G15

Suggested Citation

Kenourgios, Dimitris and Dimitriou, Dimitrios I. and Simos, Theodore, Financial Crises, Exchange Rate Linkages and Uncovered Interest-Rate Parity: Evidence from G7 Markets (September 11, 2017). Economic Modelling, Vol. 66, 112-120. Available at SSRN: https://ssrn.com/abstract=3035364

Dimitris Kenourgios (Contact Author)

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Office 521
Athens, 10559
Greece
+30 210 3689449 (Phone)

Dimitrios I. Dimitriou

National and Kapodistrian University of Athens ( email )

Department of Economics
Athens
Greece

University of Ioannina - Department of Economics ( email )

45110 Ioannina
Greece

Theodore Simos

University of Ioannina - Department of Economics ( email )

45110 Ioannina
Greece

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