Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/229001
Authors: 
Eguren-Martin, Fernando
Sokol, Andrej
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2387
Abstract: 
We document how the 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 (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Our approach delivers a more nuanced picture than one based on standard OLS regression. 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 net foreign asset positions, 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.
Subjects: 
exchange rates
tail risks
financial conditions indices
global financial cycle
quantile regression
JEL: 
F31
G15
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4030-6
Document Type: 
Working Paper

Files in This Item:
File
Size
659.43 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.