IDEAS home Printed from https://ideas.repec.org/a/wly/ijfiec/v28y2023i2p2037-2055.html
   My bibliography  Save this article

The euro to dollar exchange rate in the Covid‐19 era: Evidence from spectral causality and Markov‐switching estimation

Author

Listed:
  • Konstantinos N. Konstantakis
  • Ioannis G. Melissaropoulos
  • Theodoros Daglis
  • Panayotis G. Michaelides

Abstract

In this paper, we analyse how the Covid‐19 pandemic changed the dynamics of the euro to dollar exchange rate. To do so, we make use of spectral non‐causality tests to uncover the determinants of the euro to dollar exchange rate, using data that cover the pre‐Covid‐19 and the actual Covid‐19 era, by considering the exchange rate movements of other currencies, the stock market index of S&P 500, and the price of oil and gold, as well as their realized volatilities. Based on our findings, the Covid‐19 pandemic has indeed significantly changed the determinants of the euro to dollar exchange rate. Also, to investigate the potential shifts in the regimes of the euro to dollar exchange rate, we formulate a Markov‐switching model with two regimes, based on the determinants that have been found in the previous step. Based on our findings, the duration of the high volatility state in the Covid‐19 era has doubled, from almost 3 to approximately 6 days, compared to the pre‐Covid‐19 era, whereas the high volatility state in the Covid‐19 era is characterized by a statistically significant higher range of volatility compared to the pre‐Covid‐19 era.

Suggested Citation

  • Konstantinos N. Konstantakis & Ioannis G. Melissaropoulos & Theodoros Daglis & Panayotis G. Michaelides, 2023. "The euro to dollar exchange rate in the Covid‐19 era: Evidence from spectral causality and Markov‐switching estimation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2037-2055, April.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:2:p:2037-2055
    DOI: 10.1002/ijfe.2524
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/ijfe.2524
    Download Restriction: no
    File URL: https://libkey.io/10.1002/ijfe.2524?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Disyatat, Piti, 2010. "Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate," Journal of Financial Stability, Elsevier, vol. 6(3), pages 145-155, September.
    2. Caraiani, Petre, 2017. "Evaluating exchange rate forecasts along time and frequency," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 60-81.
    3. Guglielmo Maria Caporale & Nicola Spagnolo, 2004. "Modelling East Asian exchange rates: a Markov-switching approach," Applied Financial Economics, Taylor & Francis Journals, vol. 14(4), pages 233-242.
    4. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2016. "The impact of oil shocks on exchange rates: A Markov-switching approach," Energy Economics, Elsevier, vol. 54(C), pages 11-23.
    5. Eric Hillebrand & Gunther Schnabl, 2008. "A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility," International Economics and Economic Policy, Springer, vol. 5(4), pages 389-401, December.
    6. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    7. Cheung, Yin-Wong & Erlandsson, Ulf G., 2005. "Exchange Rates and Markov Switching Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 314-320, July.
    8. Hnatkovska, Viktoria & Lahiri, Amartya & Vegh, Carlos A., 2013. "Interest rate and the exchange rate: A non-monotonic tale," European Economic Review, Elsevier, vol. 63(C), pages 68-93.
    9. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
    10. Claudiu Albulescu, 2020. "Coronavirus and oil price crash," Papers 2003.06184, arXiv.org, revised Mar 2020.
    11. Lizardo, Radhamés A. & Mollick, André V., 2010. "Oil price fluctuations and U.S. dollar exchange rates," Energy Economics, Elsevier, vol. 32(2), pages 399-408, March.
    12. Mardi Dungey & Vance L. Martin, 2004. "A Multifactor Model of Exchange Rates with Unanticipated Shocks: Measuring Contagion in the East Asian Currency Crisis," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(3), pages 305-330, December.
    13. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, vol. 12(3), pages 272-292, September.
    14. Lee, Hsiu-Yun & Chen, Show-Lin, 2006. "Why use Markov-switching models in exchange rate prediction?," Economic Modelling, Elsevier, vol. 23(4), pages 662-668, July.
    15. Clarida, Richard & Davis, Josh & Pedersen, Niels, 2009. "Currency carry trade regimes: Beyond the Fama regression," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1375-1389, December.
    16. Caporale, Guglielmo Maria & Hunter, John & Menla Ali, Faek, 2014. "On the linkages between stock prices and exchange rates: Evidence from the banking crisis of 2007–2010," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 87-103.
    17. Engel, Charles, 1994. "Can the Markov switching model forecast exchange rates?," Journal of International Economics, Elsevier, vol. 36(1-2), pages 151-165, February.
    18. Marion Kohler, 2010. "Exchange rates during financial crises," BIS Quarterly Review, Bank for International Settlements, March.
    19. Robert Dekle & Cheng Hsiao & Siyan Wang, 2002. "High Interest Rates and Exchange Rate Stabilization in Korea, Malaysia, and Thailand: An Empirical Investigation of the Traditional and Revisionist Views," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 64-78, February.
    20. di Giovanni, Julian & Shambaugh, Jay C., 2008. "The impact of foreign interest rates on the economy: The role of the exchange rate regime," Journal of International Economics, Elsevier, vol. 74(2), pages 341-361, March.
    21. Alfred Haug & Syed Basher & Perry Sadorsky, 2016. "The impact of oil price shocks on exchange rates: A non-linear smooth-transition approach," EcoMod2016 9226, EcoMod.
    22. Nikolsko-Rzhevskyy, Alex & Prodan, Ruxandra, 2012. "Markov switching and exchange rate predictability," International Journal of Forecasting, Elsevier, vol. 28(2), pages 353-365.
    23. Nagayasu, Jun, 2001. "Currency crisis and contagion: evidence from exchange rates and sectoral stock indices of the Philippines and Thailand," Journal of Asian Economics, Elsevier, vol. 12(4), pages 529-546.
    24. Hüseyin Tastan, 2015. "Testing for spectral Granger causality," Stata Journal, StataCorp LP, vol. 15(4), pages 1157-1166, December.
    25. Frommel, Michael & MacDonald, Ronald & Menkhoff, Lukas, 2005. "Markov switching regimes in a monetary exchange rate model," Economic Modelling, Elsevier, vol. 22(3), pages 485-502, May.
    26. Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, vol. 29(3), pages 493-509.
    27. Lin, Chien-Hsiu, 2012. "The comovement between exchange rates and stock prices in the Asian emerging markets," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 161-172.
    28. David M. Gould & Steven B. Kamin, 1999. "The impact of monetary policy on exchange rates during financial crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    29. Richard A. Ajayi & Mbodja Mougouė, 1996. "On The Dynamic Relation Between Stock Prices And Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, June.
    30. Gavin, Michael, 1989. "The stock market and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 8(2), pages 181-200, June.
    31. Peng, Wei & Hu, Shichao & Chen, Wang & Zeng, Yu-feng & Yang, Lu, 2019. "Modeling the joint dynamic value at risk of the volatility index, oil price, and exchange rate," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 137-149.
    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. Konstantakis, Konstantinos N. & Xidonas, Panos & Michaelides, Panayotis G. & Goutte, Stéphane, 2023. "Gold and CoVid-19: Uncovering the safe haven hypothesis with dynamic MSR modeling," International Review of Financial Analysis, Elsevier, vol. 89(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alexandros Pasiouras & Theodoros Daglis, 2020. "The Dollar Exchange Rates in the Covid-19 Era: Evidence from 5 Currencies," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 2), pages 352-361.
    2. Xie, Zixiong & Chen, Shyh-Wei & Wu, An-Chi, 2020. "The foreign exchange and stock market nexus: New international evidence," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 240-266.
    3. Tian, Maoxi & El Khoury, Rim & Alshater, Muneer M., 2023. "The nonlinear and negative tail dependence and risk spillovers between foreign exchange and stock markets in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    4. Christos Kollias & Stephanos Papadamou & Costas Siriopoulos, 2016. "Stock markets and effective exchange rates in European countries: threshold cointegration findings," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(2), pages 215-274, August.
    5. Oguzhan Ozcelebi & Nurtac Yildirim, 2017. "Impacts of short-term interest rates on stock returns and exchange rates: Empirical evidence from EAGLE countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 26(2), pages 228-255, February.
    6. Hong-Ghi Min & Judith A. McDonald & Sang-Ook Shin, 2016. "What Makes a Safe Haven? Equity and Currency Returns for Six OECD Countries during the Financial Crisis," Annals of Economics and Finance, Society for AEF, vol. 17(2), pages 365-402, November.
    7. Josh Stillwagon & Peter Sullivan, 2020. "Markov switching in exchange rate models: will more regimes help?," Empirical Economics, Springer, vol. 59(1), pages 413-436, July.
    8. Constandina Koki & Stefanos Leonardos & Georgios Piliouras, 2020. "Exploring the Predictability of Cryptocurrencies via Bayesian Hidden Markov Models," Papers 2011.03741, arXiv.org, revised Dec 2020.
    9. Xiyong Dong & Seong‐Min Yoon, 2018. "Structural breaks, dynamic correlations, and hedge and safe havens for stock and foreign exchange markets in Greater China," The World Economy, Wiley Blackwell, vol. 41(10), pages 2783-2803, October.
    10. Xingxing He & Korhan K. Gokmenoglu & Dervis Kirikkaleli & Syed Kumail Abbas Rizvi, 2023. "Co‐movement of foreign exchange rate returns and stock market returns in an emerging market: Evidence from the wavelet coherence approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1994-2005, April.
    11. Koki, Constandina & Leonardos, Stefanos & Piliouras, Georgios, 2022. "Exploring the predictability of cryptocurrencies via Bayesian hidden Markov models," Research in International Business and Finance, Elsevier, vol. 59(C).
    12. Suman Das & Saikat Sinha Roy, 2021. "Predicting regime switching in BRICS currency volatility: a Markov switching autoregressive approach," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 48(2), pages 165-180, June.
    13. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    14. N Mozumder & G De Vita & K.S. Kyaw & C Larkin, 2015. "Volatility Spillover Between Stock Prices and Exchange Rates: New Evidence Across the Recent Financial Crisis Period," Economic Issues Journal Articles, Economic Issues, vol. 20(1), pages 43-64, March.
    15. Juan Carlos Cuestas & Bo Tang, 2015. "Exchange Rate Changes and Stock Returns in China: A Markov Switching SVAR Approach," Working Papers 2015024, The University of Sheffield, Department of Economics.
    16. Malik, Farooq, 2021. "Volatility spillover between exchange rate and stock returns under volatility shifts," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 605-613.
    17. Do, Hung Xuan & Brooks, Robert & Treepongkaruna, Sirimon, 2015. "Realized spill-over effects between stock and foreign exchange market: Evidence from regional analysis," Global Finance Journal, Elsevier, vol. 28(C), pages 24-37.
    18. Yang, Sheng-Ping, 2017. "Exchange rate dynamics and stock prices in small open economies: Evidence from Asia-Pacific countries," Pacific-Basin Finance Journal, Elsevier, vol. 46(PB), pages 337-354.
    19. Maud Korley & Evangelos Giouvris, 2021. "The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa," JRFM, MDPI, vol. 14(3), pages 1-30, March.
    20. Morales-Zumaquero, Amalia & Sosvilla-Rivero, Simón, 2018. "Volatility spillovers between foreign exchange and stock markets in industrialized countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 121-136.

    More about this item

    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:wly:ijfiec:v:28:y:2023:i:2:p:2037-2055. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/1076-9307/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.