 Tails of Foreign Exchange-at-Risk (FEaR)Janeway Institute Working Papers from Faculty of Economics, University of Cambridge Abstract: I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as suggested by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators’ and hedgers’ currency futures positions substantiates my model’s mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status. Keywords: Disaster Risk; Exchange Rates; Liquidity Yields; Quantile regression; U.S. Safety (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cam:camjip:2311 Access Statistics for this paper More papers in Janeway Institute Working Papers from Faculty of Economics, University of Cambridge |
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