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Understanding exchange rate shocks during COVID-19

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  • Narayan, Paresh Kumar

Abstract

Using a dynamic VAR model fitted to hourly data, we evaluate the evolution of spillover shocks from exchange rates returns of EURO, Yen, CAD and GBP. We find that over the COVID-19 sample: (a) total exchange rate shock spillovers explain around 37.7% of the forecast error variance in the exchange rate market compared to only 26.1% in the pre-COVID-19 period; and (b) exchange rate own shocks explain between 56% to 75% of own exchange rate movements. These results hold in multiple robustness tests. The implication is that exchange rates predict most of their own changes. We confirm this through an economic significance test where we show that the shock spillovers predict exchange rate returns and these predicted exchange rates can be useful in extracting buy and sell trading signals.

Suggested Citation

  • Narayan, Paresh Kumar, 2022. "Understanding exchange rate shocks during COVID-19," Finance Research Letters, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:finlet:v:45:y:2022:i:c:s1544612321002531
    DOI: 10.1016/j.frl.2021.102181
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    7. Yu, Bok-Keun & Kim, Kwon Sik, 2026. "Volatility spillover effects in foreign exchange markets among China, Japan, and South Korea," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 48(2), pages 89-109.
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    11. Kim, Young-Sung & Kim, Dong-Jun & Choi, Sun-Yong, 2025. "Dynamic spillover analysis between FX and cryptocurrency markets across different market conditions: A quantile VAR approach," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
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