Patterns of Currency Co-movement: Changes in the Impact of Global Currencies
Patterns of Currency Co-movement: Changes in the Impact of Global Currencies

Author(s): Małgorzata Domańska, Ryszard Doman
Subject(s): Supranational / Global Economy, Economic history, Present Times (2010 - today), Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: exchange rates; global currencies; minor currencies; linkages; copula; Markov regime switching; tail dependence;
Summary/Abstract: In the paper, we analyze the pattern of currency co-movement and document the impact of global currencies (USD, EUR, GBP, JPY) on selected minor ones. The investigation of linkages in the currency market is more complicated than it is in the case of capital markets. The reason for this is that the analysis of co-movement between two currencies requires the consideration of exchange rates which are always calculated against a third currency. The choice of this third currency certainly influences the results of comparison. There prevails an opinion that the pattern of the co-movement in the currency market is significantly driven by the relative influence of the global currencies, mostly the US dollar and the euro, but to some degree also by the British pound and the Japanese yen. In the paper, we examine the dynamics of strength and areas of this influence in the global currency market during the period 2011-2018. We pay special attention to the changes in the pattern caused by the European debt crisis and the UK decision about Brexit. The dynamics of the linkages is modeled by means of Markov regime switching copula models, and the strength of the linkages is described using dynamic Spearman’s rho coefficients and the dynamic coefficients of tail dependence.

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