The Behavior of Currencies during Risk-off Episodes

Reinout De Bock and Irineu de Carvalho Filho

No 2013/008, IMF Working Papers from International Monetary Fund

Abstract: Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency?s yield and relationship to broader risks in recent years.

Keywords: WP; currency; U.S. dollar; Risk-off Episodes; currency risk factors; exchange rates; safe haven currencies; Ukrainian hryvnia; New Zealand dollar; risk-off episode; currency weakness; mean reversion; Mexican peso; Currencies; Depreciation; Current account balance; Central bank policy rate; Global; Africa (search for similar items in EconPapers)
Pages: 34
Date: 2013-01-11
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Citations: View citations in EconPapers (17)

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Journal Article: The behavior of currencies during risk-off episodes (2015)
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