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Downside risk and flight to quality in the currency market

Author

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  • Victoria Dobrynskaya

    (London School of Economics)

Abstract

Some currencies systematically crash together with the stock market, while others serve as a „safe haven‟. This paper studies which country macroeconomic fundamentals are consistently related to the riskiness of its currency. I look at various macroeconomic variables and find that high real interest rates in a country are associated with high downside risk of its currency, while inflation rate, nominal interest rate and other variables are not that relevant. But to be a „safe haven‟ currency, both low real interest rate and low inflation rate are required. I suggest that there is a „flight to quality‟ in the currency market when the stock market goes down.

Suggested Citation

  • Victoria Dobrynskaya, 2011. "Downside risk and flight to quality in the currency market," Working Papers 2011.5, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2011.5
    as

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    References listed on IDEAS

    as
    1. John Y. Campbell & Karine Serfaty‐De Medeiros & Luis M. Viceira, 2010. "Global Currency Hedging," Journal of Finance, American Finance Association, vol. 65(1), pages 87-121, February.
    2. 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.
    3. Angelo Ranaldo & Paul Söderlind, 2010. "Safe Haven Currencies," Review of Finance, European Finance Association, vol. 14(3), pages 385-407.
    4. Andrew Ang & Joseph Chen & Yuhang Xing, 2006. "Downside Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1191-1239.
      • Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    5. Victoria Dobrynskaya, 2014. "Downside Market Risk of Carry Trades," Review of Finance, European Finance Association, vol. 18(5), pages 1885-1913.
    6. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, June.
    Full references (including those not matched with items on IDEAS)

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