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Risk and Return Spillovers among the G10 Currencies

Author

Listed:
  • Matthew Greenwood-Nimmo

    (Department of Economics, The University of Melbourne)

  • Viet Hoang Nguyen

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Barry Rafferty

    (Department of Economics, The University of Melbourne)

Abstract

We study spillovers among daily returns and innovations in option-implied risk-neutral volatility and skewness of the G10 currencies. An empirical network model uncovers substantial time variation in the interaction of risk measures and returns, both within and between currencies. We find that aggregate spillover intensity is countercyclical with respect to the federal funds rate and increases in periods of financial stress. During these times, volatility spillovers and especially skewness spillovers between currencies increase, reflecting greater systematic risk. Likewise, linkages between returns and risk measures strengthen in times of stress, with returns becoming more sensitive to risk measures and vice versa.

Suggested Citation

  • Matthew Greenwood-Nimmo & Viet Hoang Nguyen & Barry Rafferty, 2016. "Risk and Return Spillovers among the G10 Currencies," Melbourne Institute Working Paper Series wp2016n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2016n04
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    More about this item

    Keywords

    Foreign exchange markets; risk-neutral volatility; risk-neutral skewness; spillovers; coordinated crash risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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