Multi Foreign Exchange Rate Relations in Turbulent Market: Lessons from Lehman Shock

Masayuki Susai
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Masayuki Susai: Nagasaki University, Trustee and Vice President, Japan

Chapter 1 in Studies on Financial Markets in East Asia, 2011, pp 1-18 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractAs US Dollar, Euro and Japanese Yen are most heavily traded financial asset in the world, it must be difficult to find arbitrage opportunity. But in the case of Lehman Brothers problem, arbitrage opportunity might be occurred. The purpose of this paper is to see what's going on in turbulent market such as Lehman Brothers shock in most heavily traded foreign exchange market.We use ultra high frequency foreign exchange rate, its trading volume and orderflow indicator to compare the relations among three currencies in ordinary and turbulent period. We use the results in ordinary period as benchmark. With VAR, Vector Error Correction and GARCH model, we found that volume and volatility of three foreign exchange rates are highest in turbulent period. The relations among three currencies are different especially for EUR/JPY from VEC model. USD based rate did not affect on EUR/JPY in turbulent period, whereas USD based rate had clear effect on EUR/JPY during benchmark period. With the VAR and Granger Causality, we found that relations in volume and orderflow are weaker in turbulent period. Volatility covariance is highest in turbulent period but the causality is weak in this period (t-GARCH model).

Keywords: Financial Market; Foreign Exchange Rate; Sub-prime Crisis; Real Estate Market; Relationship Banking; Dividend and Share; Stock Market; Government Bond; Hedging; IPO; Return; Volatility; Liquidity; Risk Attitude; Investment Behavior; Fund Managers (search for similar items in EconPapers)
Date: 2011
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