Dynamic linkages among cross-currency swap markets under stress

Abstract

This article examines the impacts of the European sovereign debt crisis on the Dynamic Conditional Correlation (DCC) between three European currencies (EUR, CHF and GBP) and the US dollar for 1-year maturities. We found that the correlation between each pair of the swap prices significantly fluctuated over time and exhibited a higher co-movement during the crisis period, suggesting a higher degree of market integration. Importantly, applying a linear regression framework with a crisis dummy variable to the derived DCC, we find evidence of spillover effects of the sovereign debt turbulence to the cross-currency swap markets, as reflected in the increased co-movement between the EUR/USD and CHF/USD swap prices.

Evidence on time-varying inflation synchronization

“…Among frameworks frequently used to model conditional heteroskedasticity in the multivariate setting, the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity model (henceforth DCC-GARCH) introduced by Engle (2002) offers flexibility while alleviating the curse of dimensionality of standard multivariate GARCH models. The DCC-GARCH is especially popular for modelling exchange rates co-movements, contagion and interdependencies between financial assets ( Daelemans et al, 2018 ; Kim and Sun, 2017 ; Hemche et al, 2016 ; Tamakoshi and Hamori, 2013 ; Celık, 2012 ). However, several authors rely on this approach to describe the time-varying nexus between macroeconomic variables.…”

Correlation Pattern among \'Asian Paper Tigers\' Currencies: A Dynamic Conditional Correlation Approach

“…Any liquidity instability in market condition may increase the correlation between Asian countries and US (Zhang, 2011). Tamakoshi and Hamori (2013) infer the effect of European liquidity bubble on the conditional correlation between European cross currencies swap. The liquidity turbulence have resulted an extreme incremental in the co-movement within cross currency swap market.…”

“…As such, conditional or non-monotonic correlation estimation is much more relevant for portfolio managers. Thus, recently a large number of correlation investigation studies apply Dynamic Conditional Correlation (DCC henceforth) to estimate the conditional correlation pattern among tested currencies (Li, 2011;Zhang, 2011;Li et al, 2012;Tamakoshi and Hamori, 2013). When these countries' currencies are strong, they tend to display higher positive correlation among these currencies especially when they are tied with US dollar, Euro and Japanesse Yen.…”