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Asymmetric dependence in international currency markets

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  • Nikos Paltalidis
  • Victoria Patsika

Abstract

We find new channels for the transmission of shocks in international currencies, by developing a model in which shock propagations evolve from domestic stock markets, liquidity, credit risk and growth channels. We employ symmetric and asymmetric copulas to quantify joint downside risks and document that asset classes tend to experience concurrent extreme shocks. The time-varying spillover intensities cause a significant increase in cross-asset linkages during periods of high volatility, which is over and above any expected economic fundamentals, providing strong evidence of asymmetric investor induced contagion. The critical role of the credit crisis is amplified, as the beginning of an important reassessment of emerging currencies which lead to changes in the dependence structure, a revaluation and recalibration of their risk characteristics. By modelling tail risks, we also find patterns consistent with the domino effect.

Suggested Citation

  • Nikos Paltalidis & Victoria Patsika, 2020. "Asymmetric dependence in international currency markets," The European Journal of Finance, Taylor & Francis Journals, vol. 26(10), pages 994-1017, July.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:994-1017
    DOI: 10.1080/1351847X.2019.1650089
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    Cited by:

    1. Anandadeep Mandal & Sunil S. Poshakwale & Gabriel J. Power, 2021. "Do investors gain from forecasting the asymmetric return co‐movements of financial and real assets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3246-3268, July.

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