Asymmetric Dependence in International Currency Markets

Posted: 8 Dec 2017 Last revised: 29 Apr 2019

See all articles by Nikos Paltalidis

Nikos Paltalidis

Durham Business School

Victoria Patsika

University of Bath, School of management

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). Available at SSRN: https://ssrn.com/abstract=3084286

Nikos Paltalidis (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Victoria Patsika

University of Bath, School of management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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