Journal
JOURNAL OF FINANCIAL MARKETS
Volume 31, Issue -, Pages 43-62Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.finmar.2016.05.001
Keywords
Foreign exchange markets; Risk-neutral volatility; Risk-neutral skewness; Spillovers; Coordinated crash risk
Categories
Funding
- Faculty of Business and Economics at the University of Melbourne
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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. (C) 2016 Elsevier B.V. All rights reserved.
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