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

Abstract

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.

Givers or Recipients? Co-Movements between Stock Markets of CEE-3 and Developed Countries

“…This means that in the turbulent period, a negative shock in one country was treated as a disturbance in the whole region. Thus, stock markets in the CEE-3 countries did not differ from the currency markets, which were also characterized by very strong interlinkages in turbulent periods [48,50].…”

“…It is not surprising that in the last analyzed phase, the level of volatility spillover proved to be much lower than during the global financial crisis. It is commonly known that after the announcement of the OMT program, the situation of the financial markets calmed down, and linkages among stock market returns were much weaker [48,49]. Therefore, the phenomenon of the volatility transmission was much weaker than in the crisis period.…”

Systemic Risk in Post-Crisis Financial Markets

“…The cointegration relationships were estimated with a Canonical Cointegration Regression (CCR) method and are displayed in Kadlčáková and Komárek (2017). They express the equilibrium relations between exchange rates and their macroeconomic fundamentals.…”

“…A graphical representation of the actual daily exchange rates and their monthly equilibrium levels is contained in Kadlčáková and Komárek (2017). The final time span differs among countries, given different time availability for different variables at the country level.…”

Estimation of the development of the Euro to Chinese Yuan exchange rate using artificial neural networks

“…The value of the currency is determined by the Chinese central bank, which sets the average exchange rate around which the market rate, irrespective of supply or demand, may deviate on a daily basis [12]. China, of course, is striving to make the most of international trade and uses Yuan as an alternative to the dollar and the euro [13].…”