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Spillover shifts in the FX market: Implication for the behavior of a safe haven currency

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  • Kim, Young Min
  • Lee, Seojin

Abstract

This paper explores the behavior of safe haven currencies by analyzing shock transmission among major currencies. To capture state-dependent directional spillovers, we incorporate Markov regime-switching parameters into the spillover model and estimate them using a Bayesian MCMC algorithm. By considering weekly data from September 2000 to March 2020, we find that the Japanese yen and the Swiss franc, both of which yield relatively high excess returns in times of crisis, exhibit larger reductions of shock transmission and reception during periods of high-volatility than during periods of low-volatility. This implies that the safe haven currencies insulate themselves from shocks from other currencies by reducing interdependence across the FX market in crisis.

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  • Kim, Young Min & Lee, Seojin, 2023. "Spillover shifts in the FX market: Implication for the behavior of a safe haven currency," The North American Journal of Economics and Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:ecofin:v:65:y:2023:i:c:s1062940823000086
    DOI: 10.1016/j.najef.2023.101885
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    2. Chang, Hao-Wen & Lin, Chinho, 2023. "Currency portfolio behavior in seven major Asian markets," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 540-559.

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    More about this item

    Keywords

    Safe haven currencies; Markov switching; Risk transmission; Spillovers;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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