Systemic Risk Contagion in FX Market: A Frequency Connectedness and Network Analysis
14 Pages Posted: 5 May 2020
Date Written: October 2019
Abstract
In this study, we analyse systemic risk contagion between a set of most actively traded currencies (EURO, JPY, GBP, AUD, CAD and CHF) by application of VAR based frequency connectedness proposed by Baruník and Křehlík. By using this novel approach, we gauge foreign exchange (FX) market connectedness in 200‐day frequency band using spectral representation of variance decompositions of VAR and identify directional spillovers between the most actively traded foreign exchange rates. Dynamics of the overall spillover index reveals that the index capture well‐known financial stress incidents properly. Finally, network topology of directional spillovers between currency pairs is provided for visulalization interconnectedness between them.
Keywords: contagion, frequency connectedness, network analysis, spectral analysis
JEL Classification: C58, G10, F31
Suggested Citation: Suggested Citation
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Systemic Risk Contagion in FX Market: A Frequency Connectedness and Network Analysis
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