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The Behavior of Currencies during Risk-off Episodes

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Author Info

  • Reinout De Bock
  • Irineu E. Carvalho Filho

Abstract

Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency?s yield and relationship to broader risks in recent years.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/8.

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Length: 34
Date of creation: 11 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/8

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Related research

Keywords: Currencies; Exchange rates; Capital flows; Risk-off episodes; safe haven currencies; currency markets; global financial crisis; net foreign asset; foreign exchange; current account balance; currency risk; foreign asset position; global financial markets; net foreign asset position; exchange rate misalignment; bilateral exchange rates; net foreign assets; exchange rate misalignments; global financial stability; international investment; real exchange rate; net foreign asset positions; purchasing power parity; financial integration; real effective exchange rates; nominal exchange rate; exchange restrictions; exchange rate level; real exchange rates; exchange rate behavior; exchange reserves; exchange arrangements; nominal exchange rates; capital markets; foreign exchange reserves; currency appreciation; exchange rate adjustments;

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References

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  1. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Center for International Economics, Working Paper Series qt5pv1j341, Center for International Economics, UC Santa Cruz.
  2. McCauley, Robert, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage and Safe Assets," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(2), pages 145-154.
  3. Gian‐Maria Milesi‐Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis," Economic Policy, CEPR & CES & MSH, vol. 26(66), pages 285-342, 04.
  4. Christian Grisse & Thomas Nitschka, 2013. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Working Papers 2013-04, Swiss National Bank.
  5. Habib, Maurizio Michael & Stracca, Livio, 2011. "Getting beyond carry trade: what makes a safe haven currency?," Working Paper Series 1288, European Central Bank.
  6. Òscar Jordà & Alan M. Taylor, 2009. "The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself," NBER Working Papers 15518, National Bureau of Economic Research, Inc.
  7. 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.
  8. Alan M. Taylor, 2012. "The great leveraging," BIS Working Papers 398, Bank for International Settlements.
  9. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series 4943, The World Bank.
  10. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347 National Bureau of Economic Research, Inc.
  11. Masahiro Nozaki, 2010. "Do Currency Fundamentals Matter for Currency Speculators?," IMF Working Papers 10/39, International Monetary Fund.
  12. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments," IMF Occasional Papers 261, International Monetary Fund.
  13. Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 303-324.
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Citations

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Cited by:
  1. 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.
  2. Virginie Coudert & Cyriac Guillaumin & Hélène Raymond, 2014. "Looking at the other side of carry trades: Are there any safe haven currencies?," EconomiX Working Papers 2014-13, University of Paris West - Nanterre la Défense, EconomiX.
  3. 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.

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