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Dynamic exchange rate dependences: The effect of the U.S.-China trade war

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  • Xu, Yingying
  • Lien, Donald

Abstract

Since March 2018 the United States and China have been locked in a trade confrontation featured by huge retaliatory tariffs. This paper investigates the impact of the U.S.-China trade war on the dynamic dependences of Chinese Yuan (CNY) and the currencies of its major trade partners merging a generalized autoregressive score-driving (GAS) model and the copula approach. The GAS framework is used to capture the marginal distributions of each exchange rate return series and then to estimate the dynamic copula correlation between CNY and major trading currencies. We document intra-regional currency contagions that the dependences of KRW-CNY and SGD-CNY have increased and remained at high levels, whereas the dependence of JPY-CNY is reduced after the breakout of the trade war. The dependences of AUD-CNY and EUR-CNY also increase in the post-war period. Appreciations in the USD against target currency and the downside risk of the global economy caused by the trade war are possible factors driving changes in exchange rates and dependences between CNY and currencies of major trade partners.

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  • Xu, Yingying & Lien, Donald, 2020. "Dynamic exchange rate dependences: The effect of the U.S.-China trade war," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:intfin:v:68:y:2020:i:c:s1042443120301220
    DOI: 10.1016/j.intfin.2020.101238
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    More about this item

    Keywords

    Exchange rates; Trade war; Dependence; GAS; Copula;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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