Dynamic connectedness of global currencies: a conditional Granger-causality approach

Conditional granger causality framework in Barnett and Seth (2014) is employed to measure the connectedness among the most globally traded currencies. The connectedness exhibits dynamics through time on both breadth and depth dimensions at three levels: node-wise, group-wise and system-wise. Overall, rolling connectedness series could capture major systemic events like Lehman Brothers'collapse and the get-through of Outright Monetary Transactions in Europe in September 2012. The rolling total breath connectedness series spike during high-risk episodes, becomes more stable in lower risk environment and is positively correlated with volatility index and Ted spread, thus, can be considered as a systemic risk indicator in light of Billio et al. (2012). Global currencies tend structure into communities based on connection strength and density. While more links are found related to currencies from emerging markets, G11 currencies are net spreaders of foreign exchange rate returns. Finally, hard currencies including Canadian dollar, Norwegian Krone and Japanese Yen frequently present among the top most connected, though the centrality positions vary over time.