Measuring Exchange Rate Risks During Periods of Uncertainty

25 Pages Posted: 17 Jun 2020

See all articles by Laurent Ferrara

Laurent Ferrara

SKEMA Business School; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Université Paris Ouest - Nanterre, La Défense - EconomiX

Joseph Yapi

EconomiX - University Paris Nanterre

Date Written: June 15, 2020

Abstract

In this paper, we empirically look at the effects of uncertainty on risk measures for exchange rates, by focusing on two recent specific periods: the Brexit and the outbreak of the Covid-19. Based on a Fama regression extended with uncertainty measures, we forecast exchange rate in the short run through a quantile regression approach. By fitting a Skewed-Student distribution to the quantile forecasts, we put forward measures of risks for appreciation and depreciation of the expected exchange rates. We point out two interesting results. First, we show that the increase in Brexit-related uncertainty is strongly associated to higher future depreciation risks of the British Pound vs the Euro, as a mistrust towards the British economy. Second, we get that the Covid-related uncertainty is perceived as a global risk, leading to a flight-to-safety move towards the US Dollar and associated high depreciation risks for emerging currencies.

Keywords: Exchange rate, Risk measures, Fama regression, Uncertainty, Covid-19 crisis, Brexit

JEL Classification: C22, C53, F31

Suggested Citation

Ferrara, Laurent and Yapi, Joseph, Measuring Exchange Rate Risks During Periods of Uncertainty (June 15, 2020). CAMA Working Paper No. 60/2020, Available at SSRN: https://ssrn.com/abstract=3626820 or http://dx.doi.org/10.2139/ssrn.3626820

Laurent Ferrara (Contact Author)

SKEMA Business School ( email )

Paris la Défense, 92916
France

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
92000

Joseph Yapi

EconomiX - University Paris Nanterre ( email )

200 avenue de la république
Nanterre
France

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