Journal article
Risk and return spillovers among the G10 currencies
M Greenwood-Nimmo, VH Nguyen, B Rafferty
Journal of Financial Markets | Elsevier | Published : 2016
Abstract
We study spillovers among daily returns and innovations in the option-implied risk-neutral volatility and skewness of the G10 currencies. Using an empirical network model, we uncover substantial time variation in the interaction of returns and risk measures, both within and between currencies. We find that aggregate spillover intensity is countercyclical with respect to the federal funds rate and increases in periods of financial stress. Cross-currency spillovers of volatility and especially of skewness increase in times of stress, reflecting greater systematic risk. Similarly, in such times, returns become more sensitive to risk measures and vice versa.
Grants
Funding Acknowledgements
We are indebted to J.P. Morgan and to Raphael Brun-Aguerre in particular for providing the FX options data used to compute the risk-neutral moments. We have benefited from constructive discussions with Heather Anderson, Alessio Bonato, Efrem Castelnuovo, Yu-chin Chen, Vance Martin, Anella Munro, Chris Neely, Kalvinder Shields, Yongcheol Shin, and Chris Skeels and from the comments of participants at the First Conference on Recent Developments in Financial Econometrics and Applications (Deakin University, December 2014) and at a research seminar at the University of Auckland. Financial support from the Faculty of Business and Economics at the University of Melbourne is gratefully acknowledged. The usual disclaimer applies.