Measuring Exchange Rate Risks During Periods of Uncertainty

Abstract

In this paper, we empirically look at the effects of uncertainty on risk measures for exchange rates, by focusing on two recent specific periods: the Brexit and the outbreak of the Covid-19. Based on a Fama regression extended with uncertainty measures, we forecast exchange rate in the short run through a quantile regression approach. By fitting a Skewed-Student distribution to the quantile forecasts, we put forward measures of risks for appreciation and depreciation of the expected exchange rates. We point out two interesting results. First, we show that the increase in Brexit-related uncertainty is strongly associated to higher future depreciation risks of the British Pound vs the Euro, as a mistrust towards the British economy. Second, we get that the Covid-related uncertainty is perceived as a global risk, leading to a flight-to-safety move towards the US Dollar and associated high depreciation risks for emerging currencies.

Research on Relationship of British Pound Exchange Rate and the COVID-19 Pandemic Situation Based on Correlation Analysis by Excel

“…Ferrara and Yapi [10] express in a series of research that during periods of uncertainty such as COVID-19, the exchange rates of different currencies are bound to be severely affected. They illustrate this assertion using an example of how the British Pound has been fluctuating during the pandemic [8].…”