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Uncertainty and currency performance: A quantile-on-quantile approach

Liyan Han, Yang Liu and Libo Yin

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 702-729

Abstract: We utilize a quantile-on-quantile (QQ) approach to uncover the complex and unstable relationships between uncertainty and the currency performance of developed and developing countries. Strong empirical evidence demonstrates that the state-dependent spillover effect of US uncertainty exerts shocks on exchange rates. We shed new light on the asymmetric characteristic of “flight to quality.” When US uncertainty is at a high level, safe-haven currencies are favored, while the weak currencies depreciate. However, with a low quantile of uncertainty, the developed currencies remain relatively stable, while emerging currencies are confronted by greater depreciation. Moreover, unexpected uncertainty spillover from the US to different currency markets plays an important role under low uncertainty, heightening the variations in exchange rates and causing the currency values to deviate.

Keywords: Financial uncertainty; Macro uncertainty; Foreign exchange rates; Nonlinear relationship; Quantile-on-quantile method; Asymmetric impact (search for similar items in EconPapers)
Date: 2019
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