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Dynamic information spillovers in intraregionally-focused spot and forward currency markets

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  • Wang, Xi
  • Yang, Jiao-Hui
  • Wang, Kai-Li
  • Fawson, Christopher

Abstract

This paper proposes an intraregionally-focused tri-currency modeling framework to investigate dynamic information spillovers across spot and forward exchange rate markets in frontier and emerging country currencies, for both price levels and volatilities. Empirical estimates of structural parameters were obtained using an MGARCH–MSKST model that incorporated the term structure of non-deliverable forward (NDF) and deliverable forward (DF) markets, the dominance of regional currencies, and the influence of differing forward contract maturities (1-, 3-, 6- and 12-months). The currencies for nine countries were grouped into three regions: Northeast Asia (China, Korea and Taiwan); South/Southeast Asia (India, Indonesia and Philippines); and Latin America (Brazil, Chile and Columbia). The currency for each selected country was evaluated within the regionally determined tri-currency system. We found that NDF markets play a dominant role over DF markets with regard to price discovery during periods of tranquility. During periods of crisis, both NDF and DF markets exhibit a more balanced impact on currency market price discovery mechanisms. In addition, distinct differences were observed across regions: currencies in Northeast Asia were shown to be affected by the Chinese renminbi during periods of crisis and the Indian rupee could be regarded as the dominant currency in South/Southeast Asia. No robust results were obtained with regard to the dominance of currencies in Latin America. Finally, our results also suggest important distinctions between the effect of various instrument maturities on NDF and DF market returns – with DF returns being more responsive to longer maturities (6-months and 12-months). During tranquil periods NDF returns are more responsive to shorter maturities, but during crisis periods this effect is diminished.

Suggested Citation

  • Wang, Xi & Yang, Jiao-Hui & Wang, Kai-Li & Fawson, Christopher, 2017. "Dynamic information spillovers in intraregionally-focused spot and forward currency markets," Journal of International Money and Finance, Elsevier, vol. 71(C), pages 78-110.
  • Handle: RePEc:eee:jimfin:v:71:y:2017:i:c:p:78-110
    DOI: 10.1016/j.jimonfin.2016.11.002
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    Keywords

    Regionally differentiated cross-currency effects; DF and NDF currency markets; Term structure;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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