Asymmetric Dependence in International Currency Markets
The European Journal of Finance, Forthcoming
Posted: 8 Dec 2017 Last revised: 21 Jan 2020
Date Written: December 7, 2017
We find new channels for the transmission of shocks in international currencies, by developing a model in which shock propagations evolve from domestic stock markets, liquidity, credit risk and growth channels. We employ symmetric and asymmetric copulas to quantify joint downside risks and document that asset classes tend to experience concurrent extreme shocks. The time-varying spillover intensities cause a significant increase in cross-asset linkages during periods of high volatility, which is over and above any expected economic fundamentals, providing strong evidence of asymmetric investor induced contagion. The critical role of the credit crisis is amplified, as the beginning of an important reassessment of emerging currencies which lead to changes in the dependence structure, a revaluation and recalibration of their risk characteristics. By modelling tail risks, we also find patterns consistent with the domino effect.
Keywords: Asymmetric Foreign Exchange Volatility, Emerging Markets, Tail Risk, Contagion Channels, Domino Effect, Copula Functions
JEL Classification: C5, F31, F37, G01, G17
Suggested Citation: Suggested Citation