IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/4338.html
   My bibliography  Save this paper

Fundamentals and Joint Currency Crises

Author

Listed:
  • de Vries, Casper G
  • Hartmann, Philipp
  • Straetmans, Stefan

Abstract

In this note we demonstrate that in affine models for bilateral exchange rates, the nature of return interdependence during crises depends on the tail properties of the fundamentals’ distribution. We denote crisis linkages as either strong or weak, in the sense that the dependence remains or vanishes asymptotically. We show that if one currency return reaches crisis levels, the probability that the other currency breaks down as well vanishes asymptotically if the fundamentals’ distributions exhibit light tails (like, for example, the normal). If, however, the marginal distributions exhibit heavy tails, the probability that the other currency breaks down as well remains strictly positive even in the limit. This result implies that linearity and heavy tails are sufficient conditions for joint or contagious currency crises to happen systematically through fundamentals.

Suggested Citation

  • de Vries, Casper G & Hartmann, Philipp & Straetmans, Stefan, 2004. "Fundamentals and Joint Currency Crises," CEPR Discussion Papers 4338, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4338
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4338
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jondeau, Eric & Rockinger, Michael, 2003. "Testing for differences in the tails of stock-market returns," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 559-581, December.
    2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    3. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    4. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    5. Poon, Ser-Huang & Rockinger, Michael & Tawn, Jonathan, 2001. "New Extreme-Value Dependence Measures and Finance Applications," CEPR Discussion Papers 2762, C.E.P.R. Discussion Papers.
    6. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    7. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    8. Blattberg, Robert C & Gonedes, Nicholas J, 1974. "A Comparison of the Stable and Student Distributions as Statistical Models for Stock Prices," The Journal of Business, University of Chicago Press, vol. 47(2), pages 244-280, April.
    9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    10. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    11. Acharya, Viral V & Yorulmazer, Tanju, 2003. "Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk," CEPR Discussion Papers 3743, C.E.P.R. Discussion Papers.
    12. Starica, Catalin, 1999. "Multivariate extremes for models with constant conditional correlations," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 515-553, December.
    13. Brian H. Boyer & Michael S. Gibson & Mico Loretan, 1997. "Pitfalls in tests for changes in correlations," International Finance Discussion Papers 597, Board of Governors of the Federal Reserve System (U.S.), revised 1997.
    14. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    15. Boothe, Paul & Glassman, Debra, 1987. "The statistical distribution of exchange rates: Empirical evidence and economic implications," Journal of International Economics, Elsevier, vol. 22(3-4), pages 297-319, May.
    16. Mittnik, Stefan & Paolella, Marc S. & Rachev, Svetlozar T., 2000. "Diagnosing and treating the fat tails in financial returns data," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 389-416, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lombardi, Marco J. & Calzolari, Giorgio, 2009. "Indirect estimation of [alpha]-stable stochastic volatility models," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2298-2308, April.
    2. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    3. Zhang, Ran & Czado, Claudia & Min, Aleksey, 2011. "Efficient maximum likelihood estimation of copula based meta t-distributions," Computational Statistics & Data Analysis, Elsevier, vol. 55(3), pages 1196-1214, March.
    4. Cappiello, Lorenzo & Gérard, Bruno & Kadareja, Arjan & Manganelli, Simone, 2006. "Financial integration of new EU Member States," Working Paper Series 683, European Central Bank.
    5. Matei KUBINSCHI & Dinu BARNEA, 2016. "Systemic Risk Impact on Economic Growth - The Case of the CEE Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 79-94, December.
    6. Beckmann, Daniela & Menkhoff, Lukas & Sawischlewski, Katja, 2006. "Robust lessons about practical early warning systems," Journal of Policy Modeling, Elsevier, vol. 28(2), pages 163-193, February.

    More about this item

    Keywords

    asymptotic dependence; currency market linkages; financial crises; fundamentals; heavy tails;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4338. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.