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Attention to the tail(s): global financial conditions and exchange rate risks

Author

Listed:
  • Fernando Eguren-Martin

    (Bank of England)

  • Andrej Sokol

    (European Central Bank, Bank of England and CfM)

Abstract

We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating some of the prevailing narratives about safe haven and risky currencies. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions.

Suggested Citation

  • Fernando Eguren-Martin & Andrej Sokol, 2019. "Attention to the tail(s): global financial conditions and exchange rate risks," Bank of England working papers 822, Bank of England.
    • Handle: RePEc:boe:boeewp:0822
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    3. Laurent Ferrara & Joseph Yapi, 2022. "Measuring exchange rate risks during periods of uncertainty," International Economics, CEPII research center, issue 170, pages 202-212.
    4. Cañon, Carlos & Gerba, Eddie & Pambira, Alberto & Stoja, Evarist, 2024. "An unconventional FX tail risk story," Journal of International Money and Finance, Elsevier, vol. 148(C).
    5. Eguren-Martin, Fernando & O'Neill, Cian & Sokol, Andrej & von dem Berge, Lukas, 2024. "Capital flows-at-risk: Push, pull and the role of policy," Journal of International Money and Finance, Elsevier, vol. 147(C).
    6. Simon Lloyd & Ed Manuel & Konstantin Panchev, 2024. "Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 335-392, March.
    7. Fernando Eguren-Martin & Sevim Kösem & Guido Maia & Andrej Sokol, 2024. "Targeted financial conditions indices and growth-at-risk," Bank of England working papers 1084, Bank of England.
    8. Janus, Jakub, 2025. "Global financial risk and uncovered interest parity premia in Central and Eastern Europe," Economic Modelling, Elsevier, vol. 148(C).
    9. David Aikman & Jonathan Bridges & Sinem Hacioglu Hoke & Cian O’Neill & Akash Raja, 2019. "Credit, capital and crises: a GDP-at-Risk approach," Bank of England working papers 824, Bank of England.
    10. Sona Benecka & Petr Polak, 2023. "Regional sentiment of Central European currencies in the global context," Occasional Publications - Chapters in Edited Volumes, in: CNB Global Economic Outlook - March 2023, pages 13-20, Czech National Bank, Research and Statistics Department.
    11. Filippo Busetto, 2024. "Asymmetric expectations of monetary policy," Bank of England working papers 1058, Bank of England.
    12. Cañon, Carlos & Gerba, Eddie & Pambira, Alberto & Stoja, Evarist, 2024. "An unconventional FX tail risk story," LSE Research Online Documents on Economics 125291, London School of Economics and Political Science, LSE Library.
    13. Wang, Xichen & Duan, Xiaomei, 2024. "What leads some countries to experience larger decreases in foreign flows during low-flow episodes? Evidence from international portfolio flows," Journal of International Money and Finance, Elsevier, vol. 148(C).

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    More about this item

    Keywords

    Exchange rates; tail risks; financial conditions indices; global financial cycle; quantile regressio;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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