Fundamentals and Joint Currency Crises

Casper G. de Vries (), Philipp Hartmann and Stefan Straetmans

No 4338, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this note we demonstrate that in affine models for bilateral exchange rates, the nature of return interdependence during crises depends on the tail properties of the fundamentals’ distribution. We denote crisis linkages as either strong or weak, in the sense that the dependence remains or vanishes asymptotically. We show that if one currency return reaches crisis levels, the probability that the other currency breaks down as well vanishes asymptotically if the fundamentals’ distributions exhibit light tails (like, for example, the normal). If, however, the marginal distributions exhibit heavy tails, the probability that the other currency breaks down as well remains strictly positive even in the limit. This result implies that linearity and heavy tails are sufficient conditions for joint or contagious currency crises to happen systematically through fundamentals.

Keywords: asymptotic dependence; currency market linkages; financial crises; fundamentals; heavy tails (search for similar items in EconPapers)
JEL-codes: C49 F31 G12 G39 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mac
Date: 2004-03
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Working Paper: Fundamentals and joint currency crises (2004)
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