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Getting beyond carry trade: What makes a safe haven currency?

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  • Habib, Maurizio M.
  • Stracca, Livio

Abstract

The main objective of this paper is to investigate the fundamentals of safe haven currencies, which are those currencies that provide an hedge for a reference portfolio of risky assets, conditional on shocks to global risk aversion. We analyse a large panel of 52 currencies in advanced and emerging countries over almost 25years of data. We find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and whether currencies have been a good hedge in the past. In addition, the currencies of large, less financially open economies are a good hedge against global risk aversion shocks. By contrast, the level of the interest rate spread vs. the US is significant only during the latest crisis. Finally, we find some evidence of non-linearity as the importance of the fundamentals is stronger during crisis times.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 87 (2012)
Issue (Month): 1 ()
Pages: 50-64

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Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:50-64

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: VIX; Global risk aversion; Safe haven currencies; Carry trade; Globalisation;

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References

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Citations

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Cited by:
  1. McKinnon, Ronald & Liu, Zhao, 2013. "Modern Currency Wars: The United States versus Japan," ADBI Working Papers 437, Asian Development Bank Institute.
  2. Alfred Wong & Tom Fong, 2013. "Gauging the Safehavenness of Currencies," Working Papers 132013, Hong Kong Institute for Monetary Research.
  3. Dennis P. J. Botman & Irineu E. Carvalho Filho & Raphael W. Lam, 2013. "The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis," IMF Working Papers 13/228, International Monetary Fund.
  4. Michael Melvin & John Prins & Duncan Shand, 2013. "Forecasting Exchange Rates: An Investor Perspective," CESifo Working Paper Series 4238, CESifo Group Munich.
  5. Virginie Coudert & Cyriac Guillaumin & Hélene Raymond, 2014. "Looking at the Other Side of Carry Trades: Are there any Safe Haven Currencies?," Working Papers 2014-03, CEPII research center.
  6. Stracca, Livio, 2013. "The global effects of the euro debt crisis," Working Paper Series 1573, European Central Bank.
  7. Buetzer, Sascha & Habib, Maurizio Michael & Stracca, Livio, 2012. "Global exchange rate configurations: Do oil shocks matter?," Working Paper Series 1442, European Central Bank.
  8. Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.
  9. Habib, Maurizio Michael & Stracca, Livio, 2013. "Foreign investors and risk shocks: seeking a safe haven or running for the exit?," Working Paper Series 1609, European Central Bank.
  10. Irineu de Carvalho Filho, 2013. "Risk-off Episodes and Swiss Franc Appreciation: the Role of Capital Flows," Working Papers 13.07, Swiss National Bank, Study Center Gerzensee.
  11. Thomas Nitschka, 2014. "The Good? The Bad? The Ugly? Which news drive (co)variation in Swiss and US bond and stock excess returns?," Working Papers 2014-01, Swiss National Bank.

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