Exchange rate contagion in Latin America

Loaiza-Maya, Rubén; Gómez-González, José Eduardo; Velandia, Luis Fernando Melo

doi:10.1016/j.ribaf.2015.02.019

Cited by 31 publications

(10 citation statements)

References 14 publications

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“…TDCs between pairs of exchange rates including either Indonesia or South Korea are nonsignificant, except for the pair containing both countries. Our findings are similar to those of other related studies, such as Loaiza-Maya et al (2015;. The asymmetric behaviour of capital inflows in episodes of high and low global risk aversion and the different response of emerging countries' central Banks during periods of local currency appreciation and depreciation are probably explaining these appealing empirical findings.…”

Section: Resultssupporting

confidence: 91%

“…Our findings are similar to those of other related studies, such as Loaiza-Maya et al (2015;. The asymmetric behaviour of capital inflows in episodes of high and low global risk aversion and the different response of central Banks during periods of local currency appreciation and depreciation, due to the "fear of appreciation", are probably explaining these appealing empirical findings.…”

Section: Discussionsupporting

confidence: 91%

“…First, while various studies have implemented copula approaches for studying exchange rate contagion (see, for instance, Kurowicka and Cooke 2006;Aas et al 2009;and, Czado et al 2012), most of them construct C-vines or D-vines, which are particular cases of regular vines. Two exceptions are Loaiza-Maya et al (2015;, who use R-vines to study exchange rate contagion in Latin American economies. In this sense, our approach is more general than those frequently used in the literature.…”

Section: Introductionmentioning

confidence: 99%

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Detecting exchange rate contagion using copula functions

Gómez-González

Cubillos-Rocha

Melo‐Velandia

2019

The North American Journal of Economics and Finance

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We study exchange rate dependencies between seven countries from four different regions of the world. Our sample includes two developed countries, the United Kingdom and Germany (representing the Euro Area), two large emerging Asian economies, South Korea and Indonesia, two Latin American countries, Brazil and Chile, and South Africa. The currencies of all of these countries are actively traded in global forex markets and all of them are important for large international portfolio composition and rebalancing. We construct multivariate copula functions using a regular vine copula approach, allowing for very flexible dependency structures. We find evidence of exchange rate contagion for our set of countries. However, important asymmetries are worth noting. First, contagion occurs only during periods of exchange rate appreciation of the different currencies with respect to the United States Dollar. We do not find evidence of contagion for any pair of exchange rates during periods of currency depreciations. Second, contagion is more frequent in pairs of countries that include either the United Kingdom or Germany. In fact, the largest tail dependence coefficient corresponds to the pair composed by these two countries' exchange rates. Third, contagion occurs more within countries of a same region, for instance, between Brazil and Chile, and between Korea and Indonesia. This result shows that, in episodes of large currency appreciation, hedging strategies for global investors taking positions in large markets require regional diversification.

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Section: Resultssupporting

confidence: 91%

Section: Discussionsupporting

confidence: 91%

Section: Introductionmentioning

confidence: 99%

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Detecting exchange rate contagion using copula functions

Gómez-González

Cubillos-Rocha

Melo‐Velandia

2019

The North American Journal of Economics and Finance

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“…Other early attempts in dealing with contagion in currency markets were made by Eichengreen et al (1996). More recent papers shifted the emphasis from correlation based measures, often based on ARCH-type modelling, to more sophisticated approaches assessing tail dependency measures such as Copula or EVT approaches (see Loaiza-Maya et al, 2015) and Cumperayot and Kouwenberg, 2011).…”

Section: Literature Reviewmentioning

confidence: 99%

Foreign Exchange Market Contagion in Central Europe from the Viewpoint of Extreme Value Theory

Kadlcakova¹,

Komarek²

2017

Prague Economic Papers

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This paper examines contagion in the foreign exchange markets of three Central European countries and the euro area. Contagion is viewed as the occurrence of extreme events taking place in different countries simultaneously and is assessed with a measure of asymptotic tail dependence among the studied distributions. Currency crisis contagion is one strand of this research. However, the main aim of the paper is to examine the potential of bubble contagion. To this end the representative exchange rates are linked to their fundamentals using a cointegration approach. Given the long-time range required by cointegration testing, the variables are first tested for unit roots with structural breaks, whose existence is supported by these tests. In the sequel, the extreme values of the differences between actual daily exchange rates and their monthly equilibrium values determine the episodes associated with large departures from equilibrium. Using tools from Extreme Value Theory, we analyse the transmission of both standard crisis and bubble formation events in the examined currency markets. The results reveal a significant potential for contagion in the currency markets of Central Europe.

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“…In this sense, contagion relates to the behavior of market interdependence after the happening of a shock. Taking this definition as the starting point has several advantages in performing tests of contagion, as shown by Ang and Chen (2002), Bae et al (2003), Bekaert and Harvey (2003), Prasad et al (2003), Loaiza-Maya et al (2015a, 2015b, among many others. The main two advantages are testing simplicity and the possibility of distinguishing between permanent and temporal mechanisms of crises transmission.…”

Section: Literature Reviewmentioning

confidence: 99%

Financial Contagion in Latin America

Bejarano-Bejarano¹,

Gómez-González²,

Melo‐Velandia³

et al. 2015

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This study uses a Dynamic Conditional Correlation multivariate GARCH approach for testing for contagion among Latin American financial markets to shocks originated in the United States and Europe. Using daily data on stock market returns for the period comprised between July 4th, 2001 and December 30th, 2013, we find some evidence suggesting two episodes of contagion. The first corresponds to the time of the mortgage subprime crisis in the US, while the second corresponds to the period of sovereign bonds' turbulence in Europe. JEL Classification: G01; G15; C32.

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Exchange rate contagion in Latin America

Cited by 31 publications

References 14 publications

Detecting exchange rate contagion using copula functions

Detecting exchange rate contagion using copula functions

Foreign Exchange Market Contagion in Central Europe from the Viewpoint of Extreme Value Theory

Financial Contagion in Latin America

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