Asymmetric Dependence in International Currency Markets

The European Journal of Finance, Forthcoming

Posted: 8 Dec 2017 Last revised: 21 Jan 2020

See all articles by Nikos Paltalidis

Nikos Paltalidis

Durham University Business School

Victoria Patsika

Cardiff University

Date Written: December 7, 2017

Abstract

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

Paltalidis, Nikos and Patsika, Victoria, Asymmetric Dependence in International Currency Markets (December 7, 2017). The European Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3084286

Nikos Paltalidis (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Victoria Patsika

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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