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The Behavior of Currencies during Risk-off Episodes

  • Reinout De Bock
  • Irineu E. Carvalho Filho

Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency?s yield and relationship to broader risks in recent years.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/8.

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Length: 34
Date of creation: 11 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/8
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  1. Masahiro Nozaki, 2010. "Do Currency Fundamentals Matter for Currency Speculators?," IMF Working Papers 10/39, International Monetary Fund.
  2. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc.
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  7. Habib, Maurizio Michael & Stracca, Livio, 2011. "Getting beyond carry trade: what makes a safe haven currency?," Working Paper Series 1288, European Central Bank.
  8. Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 303-324.
  9. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments; CGER Methodologies," IMF Occasional Papers 261, International Monetary Fund.
  10. Christian Grisse & Thomas Nitschka, 2013. "On financial risk and the safe haven characteristics of Swiss franc exchange rates," Working Papers 2013-04, Swiss National Bank.
  11. Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, vol. 88(1), pages 74-90.
  12. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series 4943, The World Bank.
  13. Irineu de Carvalho Filho, 2013. "Risk-off Episodes and Swiss Franc Appreciation: the Role of Capital Flows," Working Papers 13.07, Swiss National Bank, Study Center Gerzensee.
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