Asymmetric dependence in international currency markets

Paltalidis, Nikos and Patsika, Viktoria (2019) Asymmetric dependence in international currency markets. European Journal of Finance, 1-53. (doi:10.1080/1351847X.2019.1650089).

Record type: Article

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.

Text

Paltalidis and Patsika_Asymmetric Dependence in International Currency Markets - Accepted Manuscript

Available under License University of Southampton Accepted Manuscript Licence.

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