Research on safe-haven currencies under global uncertainty —A new perception based on the East Asian market

Changrong Lu, Fandi Yu, Jiaxiang Li and Shilong Li

Global Finance Journal, 2024, vol. 62, issue C

Abstract: The backdrop of this research is the high global uncertainty that has amplified the demand for safe-haven assets, particularly in the East Asian market. This paper redefines the concept of a “safe-haven” currency to align with contemporary geopolitical and trade policy uncertainties, diverging from the traditional volatility index (VIX) risk measure. We investigate the risk aversion properties of East Asian currencies under these nonmarket risks using dynamic heterogeneous panel data analysis and robustness checks with double machine learning. Empirical results reveal that no East Asian currency qualifies as a safe haven under geopolitical risk and trade policy uncertainty. However, the Japanese yen (JPY) maintains its status under the VIX indicator. This study highlights the insufficiency of traditional safe havens like the JPY and underscores the importance of considering nonmarket risks, challenging the effectiveness of traditional investment strategies amid modern geopolitical and policy uncertainties. The findings suggest that investors should prioritize nonmarket risks and call for reform in the global monetary system to enhance currency resilience. The novel methodological approach to evaluating safe-haven currencies addresses the need for diversified currency portfolios to mitigate nonmarket risks.

Keywords: Safe-haven currency; Hedge; Geopolitical risk; Trade policy uncertainty; Uncovered interest parity; East Asian market (search for similar items in EconPapers)
JEL-codes: D81 E44 F31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:62:y:2024:i:c:s1044028324000851

DOI: 10.1016/j.gfj.2024.101013

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