Attention to the Tail(s): Global Financial Conditions and Exchange Rate Risks

Fernando Eguren-Martin () and Andrej Sokol
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Fernando Eguren-Martin: SPX Capital
Authors registered in the RePEc Author Service: Fernando Eguren Martin

IMF Economic Review, 2022, vol. 70, issue 3, No 4, 487-519

Abstract: Abstract We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Using quantile regression, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Compared to most standard approaches, our methodology delivers a more nuanced picture of exchange rate behaviour, allowing for example to make probabilistic statements about the likelihood of observing large swings in returns given the prevailing global financial environment. We also identify macroeconomic fundamentals associated with different tail dynamics: currencies of countries with higher interest rates, low levels of international reserves and large fiscal deficits display more marked increases in the likelihood of large losses in response to a tightening of global financial conditions.

Keywords: Exchange rates; Tail risks; Financial conditions indices; Global financial cycle; Quantile regression (search for similar items in EconPapers)
JEL-codes: C22 F31 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Attention to the tail(s): global financial conditions and exchange rate risks (2020)
Working Paper: Attention to the tail(s): global financial conditions and exchange rate risks (2019)
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DOI: 10.1057/s41308-022-00160-0

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