Financial stress and its non-linear impact on CEE exchange rates

Tomas Adam, Soňa Benecká and Jakub Matějů

Journal of Financial Stability, 2018, vol. 36, issue C, 346-360

Abstract: This paper studies the reaction of selected CEE (satellite) currencies to increased financial stress in the euro area (core) and also in global financial markets. We suggest that this reaction might be non-linear; the “safe haven” status of a satellite currency may hold in calm periods, but breaks down when risk aversion is elevated. A stylized model of portfolio allocation between assets denominated in euro and the satellite currency suggests the presence of two regimes characterized by different reactions of the exchange rate to an increased stress in the euro area. In the “diversification” regime, the satellite currency appreciates in reaction to an increase in the expected variance of EUR assets, while in the “flight to safety” regime, the satellite currency depreciates in response to increased expected volatility. We suggest that the switch between regimes is related to changes in risk aversion, driven by the level of strains in the financial system as captured by financial stress indicators. Using the Bayesian Markov-switching VAR model, the presence of these regimes is identified in the case of the Czech koruna, the Hungarian forint and the Polish zloty.

Keywords: Asset allocation; Exchange rates; Financial stress; Markov-switching (search for similar items in EconPapers)
JEL-codes: E44 F31 G12 G20 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S157230891830250X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:36:y:2018:i:c:p:346-360

DOI: 10.1016/j.jfs.2018.04.008

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().