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Financial contagion and contagion channels in the forex market: A new approach via the dynamic mixture copula-extreme value theory

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  • Wang, Haiying
  • Yuan, Ying
  • Li, Yiou
  • Wang, Xunhong

Abstract

We propose a new approach to the study of financial contagion and contagion channels in the forex market by using a dynamic mixture copula-extreme value theory (DMC-EVT) model. This method allows us to elucidate the complex and dynamic dependence between forex markets. By analyzing 39 currencies that are actively traded on the forex market during the period 2005–2009, our empirical study shows that the DMC-EVT model outperforms the alternative copula models. Furthermore, we confirm the existence of financial contagion in the forex market during the 2007–2009 global financial crisis, and find that wealth constraints are the contagion channel during the crisis. Our results provide important insights on portfolio and risk management.

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  • Wang, Haiying & Yuan, Ying & Li, Yiou & Wang, Xunhong, 2021. "Financial contagion and contagion channels in the forex market: A new approach via the dynamic mixture copula-extreme value theory," Economic Modelling, Elsevier, vol. 94(C), pages 401-414.
  • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:401-414
    DOI: 10.1016/j.econmod.2020.10.002
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    More about this item

    Keywords

    Financial contagion; Contagion channels; Dynamic mixture copula; Extreme value theory;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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