An Unconventional FX Tail Risk Story

Carlos Cañon, Eddie Gerba, Alberto Pambira and Evarist Stoja

No 10629, CESifo Working Paper Series from CESifo

Abstract: We examine how the tail risk of currency returns over the past 20 years were impacted by central bank (monetary and liquidity) measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.

Keywords: unconventional and conventional monetary policy; liquidity measures; currency tail risk; systematic and idiosyncratic components of tail risk (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 G15 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-mac, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10629

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