Downside risk and flight to quality in the currency market

Victoria Dobrynskaya

No 2011.5, Working Papers from International Network for Economic Research - INFER

Abstract: Some currencies systematically crash together with the stock market, while others serve as a „safe haven‟. This paper studies which country macroeconomic fundamentals are consistently related to the riskiness of its currency. I look at various macroeconomic variables and find that high real interest rates in a country are associated with high downside risk of its currency, while inflation rate, nominal interest rate and other variables are not that relevant. But to be a „safe haven‟ currency, both low real interest rate and low inflation rate are required. I suggest that there is a „flight to quality‟ in the currency market when the stock market goes down.

Keywords: currency risk; downside beta; crash risk; carry trades (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011
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