European Currency Co-Movements and Contagion: Evidence from a Bayesian TVP-(Pseudo)FAVAR Model

Posted: 8 May 2018

See all articles by Nikolaos Antonakakis

Nikolaos Antonakakis

Vienna University of Economics and Business; University of Portsmouth

Ioannis Chatziantoniou

University of Portsmouth

David Gabauer

Johannes Kepler University; Webster University - Webster Vienna Private University

Date Written: April 23, 2018

Abstract

In this study we examine the role of the Euro on currency co-movements and contagion considering six major currencies (i.e., EUR(DM), JPY, GBP, CHF, AUD, as well as, CAD) and their corresponding USD exchange rates. The period of study extends from January 2, 1975 to April 8, 2016. The selected period allows us to further identify five distinct intervals, all of which can be regarded as milestones for international economic developments. First, we model conditional volatility, where we introduce a new DCC-GARCH-Copula model with mixed underlying univariate GARCH processes to account for the different characteristics of exchange rate returns. In turn, conditional variances are further integrated into a Bayesian TVP-(pseudo)FAVAR model whereupon, conditional volatility connectedness across currencies is also investigated. Main findings show that conditional correlations decline during the more flexible exchange rates regimes. In addition, contagion in the European market appears to be more pronounced given that both the conditional and the unconditional correlations between the Euro, the GBP and the CHF are relatively high within every considered regime. What is more, volatility connectedness is rather strong throughout the period of study; however, the relative strength of the EUR(DM) rather depends on the respective interval. Apparently, during the Great Recession the Euro becomes weaker. Results remain robust to a series of tests.

Keywords: Bayesian TVP-(Pseudo)FAVAR, Exchange Rate Regimes, Connectedness

JEL Classification: C32, F31, G15

Suggested Citation

Antonakakis, Nikolaos and Chatziantoniou, Ioannis and Gabauer, David, European Currency Co-Movements and Contagion: Evidence from a Bayesian TVP-(Pseudo)FAVAR Model (April 23, 2018). Available at SSRN: https://ssrn.com/abstract=3167203 or http://dx.doi.org/10.2139/ssrn.3167203

Nikolaos Antonakakis

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

HOME PAGE: http://www.wu.ac.at/ie/en/team/nikos

University of Portsmouth ( email )

Richmond Building
Portland Street
Portsmouth, Hampshire PO1 3DE
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/nikolaos-antonakakis.html

Ioannis Chatziantoniou

University of Portsmouth ( email )

University House
Winston Churchhill Avenue
Portsmouth, Hampshire PO1 2UP
United Kingdom

David Gabauer (Contact Author)

Johannes Kepler University ( email )

Altenbergerstra├če 69
Linz, 4040
Austria

Webster University - Webster Vienna Private University ( email )

Praterstra├če 23
Vienna, Vienna 1020
Austria

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