Financial contagion and contagion channels in the forex market: A new approach via the dynamic mixture copula-extreme value theory

Abstract

We propose a new approach to the study of financial contagion and contagion channels in the forex market by using a dynamic mixture copula-extreme value theory (DMC-EVT) model. This method allows us to elucidate the complex and dynamic dependence between forex markets. By analyzing 39 currencies that are actively traded on the forex market during the period 2005-2009, our empirical study shows that the DMC-EVT model outperforms the alternative copula models. Furthermore, we confirm the existence of financial contagion in the forex market during the 2007-2009 global financial crisis, and find that wealth constraints are the contagion channel during the crisis. Our results provide important insights on portfolio and risk management.

Financial contagion intensity during the COVID-19 outbreak: A copula approach

“…This paper extends the work of Wang et al (2021) who tested whether financial contagion exists in the forex market and whether it is driven by economic fundamentals or investors. The purpose of this study is to investigate the intensity of financial contagion during the Covid-19 based on the copula approach which is appropriate for this purpose.…”

“… Wang, Yuan, Li, and Wang (2021) investigate financial contagion and contagion channels during the global financial crisis (GFC). They use a dynamic mixture copula-extreme value theory (DMC-EVT) model for 39 currencies against the gold ounce in Europe, North America, Latin America, South America, Asia, Africa, and Oceania.…”

Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19

“…However, there are some challenges in using these methods to measure financial contagion. For instance, some methods such as the vector autoregression approach and GARCH model are based on linear assumptions and ignore the non-linear dependence that is usually observed between financial markets ( Wang, Yuan, Li et al, 2021 ). Although some other methods such as the quantile regression approach and DCCA method could capture some non-linear dependence, they are not designed to model the entire dynamic tail dependence that is more appropriate for financial contagion ( Wang, Yuan, Wang, 2021 , Ye et al, 2017 ).…”

International stock market risk contagion during the COVID-19 pandemic

“…Investigating the international risk contagion is of great importance for international investors to allocate their portfolios and for policy makers to propose relevant policies ( Bai et al., 2019 ; Coroneoet al., 2020 ; Daly et al., 2019 ; Gkillas et al., 2019 ; Li and Wei, 2018 ; Li et al., 2021a ; Park and Shin, 2020 ; Wang et al., 2021 ). However, there are few researches focusing on the risk contagion effects among international stock markets during the COVID-19 epidemic by using the realized volatility (RV) information in these markets.…”