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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: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

Authors registered in the RePEc Author Service: Fernando Eguren Martin

No 822, Bank of England working papers from Bank of England

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. Based on quantile regression results, 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 some of the prevailing narratives about safe haven and risky currencies. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of relative interest rates, current account balances and levels of international reserves display a higher 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: F31 G15 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-09-16
New Economics Papers: this item is included in nep-ifn, nep-mon, nep-opm and nep-rmg
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Working Paper: Attention to the tail(s): global financial conditions and exchange rate risks (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0822

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