Currency downside risks, liquidity and financial stability
Helena Chuliá, Julián Fernández and Jorge M. Uribe
We propose a daily index of time-varying downside risk in currency markets, which focuses on the depreciation tails of the FX variations. The index is constructed as the total dynamic cross spillovers of a system comprising the left-tail VaRs of the 20 most traded free-float currencies in the world.
DATA DESCRIPTION
We use 20 daily log-variations of the 20 most traded free-floats currencies against the US dollar. Data were retrieved from Bloomberg for the following currencies: Euro, Yen, British Pound, Australian Dollar, Canadian Dollar, Swiss Franc, Swedish Krona, Mexican Peso, New Zealand Dollar, Singapore Dollar, and Norwegian Krone, South Korean Won, Turkish Lira, Indian Rupiah, Brazilian Real, South African Rand, Polish Zloty, Thai Baht, Colombian and Philippine Pesos.
Methodology
We used variance decomposition of forecast errors, as proposed by Diebold and Yilmaz (2012), to analyze spillovers between range-based volatilities and between quantiles of daily log-variations in foreign exchange markets. To estimate the latter, we employed an asymmetric slope Conditional Autoregressive Value at Risk model (CAViaR) as introduced by Engle and Manganelli (2004).
World currency crises index
Figure: Total Volatility and VaR spillover indices. The figure shows the total (dynamic) indices based on volatility- and VaR-statistics for the full sample, which runs from December 17, 2003 to September 5, 2016 (the first observations were lost in the estimation process). The estimations were performed using rolling windows of 250 observations, forecasting horizon of 10 days, and two lags in the case of volatility and one lag in the case of VaR-statistics (following the BIC criterion). The VaR were constructed using an asymmetric CAViaR model that allows the two tails of the FX distribution to be treated differently.
- Universitat de Barcelona - Last Updated: 10-23-2016