Thursday, August 30, 2012

The behavior of currencies during risk-off episodes

Coming soon!

The behavior of currencies during risk-off episodes
Reinout De Bock and Irineu de Carvalho Filho
August 30, 2012

Abstract: Episodes of increased global risk aversion have become more frequent and severe since 2007. We find that currency markets exhibit recurrent patterns during these risk-off episodes. The Japanese Yen and Swiss franc tend to appreciate significantly versus the US dollar whereas other G-10 and emerging market currencies depreciate. In addition, information on policy rates, external position, and a currency’s long-term valuation available prior to the risk-off episode, explains the cross-sectional variation in spot returns. Currencies with wider bid-ask spreads and from countries with more restrictions on cross-border financial flows tend to depreciate during risk-off episodes. Since 2007 currency performance in a risk-off episode has become more related to a currency’s yield and relation to broader risks, and our research warns against complacency during periods of FX strength.


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