Fundamentals and Joint Currency Crises

31 Pages Posted: 19 May 2004

See all articles by Philipp Hartmann

Philipp Hartmann

European Central Bank (ECB); Centre for Economic Policy Research (CEPR) - International Macroeconomics

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

In this note we demonstrate that in affine models for bilateral exchange rates, the nature of return interdependence during crises depends on the tail properties of the fundamentals' distributions. We denote crisis linkages as either strong or weak, in the sense that the dependence remains or vanishes asymptotically. We show that if one currency return reaches crisis levels, the probability that the other currency breaks down as well vanishes asymptotically if the fundamentals' distributions exhibit light tails (like e.g. the normal). However, if the marginal distributions exhibit heavy tails, the probability that the other currency breaks down as well remains strictly positive even in the limit. This result implies that linearity and heavy tails are sufficient conditions for joint or contagious currency crises to happen systematically through fundamentals.

Keywords: Financial crises, currency market linkages, fundamentals, heavy tails, asymptotic dependence

JEL Classification: G12, F31, G39, C49

Suggested Citation

Hartmann, Philipp and Straetmans, Stefan and De Vries, Casper, Fundamentals and Joint Currency Crises (March 2004). Available at SSRN: https://ssrn.com/abstract=526987 or http://dx.doi.org/10.2139/ssrn.526987

Philipp Hartmann (Contact Author)

European Central Bank (ECB) ( email )

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Centre for Economic Policy Research (CEPR) - International Macroeconomics

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Stefan Straetmans

Maastricht University ( email )

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University of Antwerp - Faculty of Applied Economics ( email )

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Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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Tinbergen Institute

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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