Intra-Safe Haven Currency Behavior During the Global Financial Crisis

Abstract

We investigate intra-safe haven currency behavior during the recent global financial crisis. The currencies we consider are the USD, the JPY, the CHF, the EUR, the GBP, the SEK, and the CAD. We first assess which safe haven currency appreciates the most as market uncertainty increases, i.e. we assess which safe haven currency is the "safest". We then use non-temporal threshold analysis to investigate whether intra-safe haven currency behavior changes, e.g. accelerates or decelerates, as market uncertainty increases. We find that the JPY is the "safest" of safe haven currencies and that only the JPY appreciates as market uncertainty increases regardless of the prevailing level of uncertainty. For all other currencies under study we find significant market uncertainty threshold effects. We extend our analysis to also consider intra-safe haven currency behavior before and after the global financial crisis.

Is the Renminbi a Safe Haven?

“…They find that only the JPY and the USD exhibit safe haven currency properties. The results of Fatum and Yamamoto (2016), also a daily data study, suggest that during the global financial crisis the JPY exhibited the most pronounced safe haven behavior and, furthermore, that safe haven currency behavior is time-dependent, i.e. a given currency may qualify as a safe haven currency over a given period in time but not necessarily over another period in time.…”

“…In order to also consider whether the relationship between the relative value of the CNH and market uncertainty is conditional on the level of market uncertainty we extend our analysis to incorporate the non-temporal threshold testing procedure originally developed by Hansen (2000) and recently applied to the exchange rate literature by Fatum and Yamamoto (2016) and Hossfeld and MacDonald (2015). The non-temporal threshold model is described as follows:…”

Safe-haven and hedge currencies for the US, UK, and Euro area stock markets: A copula-based approach

“…Ranaldo and Söderlind (2010) provide evidence that the CHF, 2 the JPY, and (to a lesser extent) the EUR have significant safe haven properties over the period 1993-2008: these currencies tend to appreciate against the USD when US stock prices decrease, US bond prices increase, and foreign exchange (FX) markets become more volatile. Fatum and Yamamoto (2016) document evidence that the JPY is the "safest", the CHF is the "second-most safe", and the USD is the "third-most safe" safe haven currency during the global financial crisis from August 2007 to January 2009. Hossfeld and MacDonald (2015) show that the CHF and (to a lesser extent) the USD qualify as safe haven currencies over the period January 1986 to Semtember 2012.…”

“…Previous work, on the other hand, has implicitly assumed that safe haven and hedge behavior arise only from the US stock market or from a hypothetical world stock market. For instance, Fatum and Yamamoto (2016) and Hossfeld and MacDonald (2015) identify safe haven currencies by evaluating exchange rate responses to the implied volatility of S&P 500 index options, i.e. the VIX (Fatum and Yamamoto, 2016) or to returns on the MSCI world index (Hossfeld and MacDonald, 2015).…”

“…For instance, Fatum and Yamamoto (2016) and Hossfeld and MacDonald (2015) identify safe haven currencies by evaluating exchange rate responses to the implied volatility of S&P 500 index options, i.e. the VIX (Fatum and Yamamoto, 2016) or to returns on the MSCI world index (Hossfeld and MacDonald, 2015). 6 However, unless stock markets are perfectly correlated, there would be heterogeneity in the safe haven and hedge behavior across stock markets.…”