Interdependence of foreign exchange markets: A wavelet coherence analysis

Lu Yang, Xiao Jing Cai, Huimin Zhang and Shigeyuki Hamori

Economic Modelling, 2016, vol. 55, issue C, 6-14

Abstract: Based on the wavelet decomposition approach, we study co-movement among foreign exchange markets using the returns of exchange rates (GBP/USD, EUR/USD, and JPY/USD). We focus on the interdependence among returns of exchange rates during the recent global financial crisis and European debt crisis. We use a wavelet analysis because of its ability to decompose signals into high and low frequencies. This approach allows us to study shorter time periods independently of longer time periods. The results reveal strong interdependence between the euro and pound sterling at all frequency bands of scale over the sample period. With regard to the yen–pound pairwise, covariation is localized at high scales. Further, we find that interdependence is more pronounced during crises.

Keywords: Foreign exchange market; Wavelet coherence; Financial contagion; Interdependence; Asset price transmission channel (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:55:y:2016:i:c:p:6-14

DOI: 10.1016/j.econmod.2016.01.022

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