Risk and Return Spillovers among the G10 Currencies

Melbourne Institute Working Paper No. 04/16

Date: 2016

Author(s):

Matthew Greenwood-Nimmo
Viet Hoang Nguyen
Barry Rafferty

Abstract

We study spillovers among daily returns and innovations in option-implied risk-neutral volatility and skewness of the G10 currencies. An empirical network model uncovers substantial time variation in the interaction of risk measures and returns, 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. During these times, volatility spillovers and especially skewness spillovers between currencies increase, reflecting greater systematic risk. Likewise, linkages between returns and risk measures strengthen in times of stress, with returns becoming more sensitive to risk measures and vice versa.