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Currency downside risk, liquidity, and financial stability

Author

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  • Chuliá, Helena
  • Fernández, Julián
  • Uribe, Jorge M.

Abstract

We estimate volatility- and quantile (depreciation)-based spillovers across 20 global currencies against the US Dollar. In so doing, we reveal significant asymmetries in the propagation of risk across global currency markets. The quantile-based statistic reacts more significantly to events that have a sizable impact on FX markets (e.g. Brexit vote and the FX crash following the subprime crisis), which are missed by the volatility-based statistic. As such, our tail-spillover estimates constitute a new financial stability index for the FX market. This index has the advantages of being easy to build, of not requiring intraday data and of being more informative about currency crises and pressures than traditional spillover statistics based on volatilities. Finally, we also document differences in the relation between liquidity and volatility (quantile) spillovers.

Suggested Citation

  • Chuliá, Helena & Fernández, Julián & Uribe, Jorge M., 2018. "Currency downside risk, liquidity, and financial stability," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 83-102.
  • Handle: RePEc:eee:jimfin:v:89:y:2018:i:c:p:83-102
    DOI: 10.1016/j.jimonfin.2018.09.009
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    More about this item

    Keywords

    Foreign exchange; Spillovers; Currency crises; Networks;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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