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The time-frequency co-movement of Asian effective exchange rates: A wavelet approach with daily data

Xiangcai Meng and Chia-Hsing Huang

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 131-148

Abstract: To examine the co-movement characteristics of effective exchange rates across frequencies and over time, we employ the wavelet approach to analyze the daily data from four Asian economies. The empirical results indicate that: First, the foreign exchange markets of Japan and Korea are highly integrated at the scales of less than one year before 1995 and more than one year after 2005. Second, the degree of integration between Korea and Hong Kong is higher than that between Korea and Taiwan. Third, the exchange rate of Japan leads that of the others. Furthermore, to investigate the implications on portfolio diversification, we calculate the ratio of restricted to unrestricted value at risks (VaRs) and find that co-movement amplifies portfolio risks and this amplification increases with scale. In addition, to assess the stress performance of Asian foreign exchange markets conditional on a particular economy’s state, we estimate the wavelet based conditional VaR (WCoVaR) and observe that the systematic risk is larger at the scale of 2–32 days than at other scales. Investors should consider these co-movement features and systematic risk distributions when diversifying in Asian foreign exchange markets.

Keywords: Effective exchange rates; Continuous wavelet analysis; Maximum overlap discrete wavelet analysis; Multiresolution analysis; Ratio of VaRs; WCoVaR (search for similar items in EconPapers)
JEL-codes: C22 E44 F31 G15 G17 (search for similar items in EconPapers)
Date: 2019
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