Dynamic exchange rate dependences: The effect of the U.S.-China trade war

Yingying Xu and Donald Lien

Journal of International Financial Markets, Institutions and Money, 2020, vol. 68, issue C

Abstract: Since March 2018 the United States and China have been locked in a trade confrontation featured by huge retaliatory tariffs. This paper investigates the impact of the U.S.-China trade war on the dynamic dependences of Chinese Yuan (CNY) and the currencies of its major trade partners merging a generalized autoregressive score-driving (GAS) model and the copula approach. The GAS framework is used to capture the marginal distributions of each exchange rate return series and then to estimate the dynamic copula correlation between CNY and major trading currencies. We document intra-regional currency contagions that the dependences of KRW-CNY and SGD-CNY have increased and remained at high levels, whereas the dependence of JPY-CNY is reduced after the breakout of the trade war. The dependences of AUD-CNY and EUR-CNY also increase in the post-war period. Appreciations in the USD against target currency and the downside risk of the global economy caused by the trade war are possible factors driving changes in exchange rates and dependences between CNY and currencies of major trade partners.

Keywords: Exchange rates; Trade war; Dependence; GAS; Copula (search for similar items in EconPapers)
JEL-codes: C22 F31 G11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:68:y:2020:i:c:s1042443120301220

DOI: 10.1016/j.intfin.2020.101238

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