Asymmetric effects of geopolitical risk on major currencies: Russia-Ukraine tensions

In a nonparametric quantile-on-quantile regression analysis, we study the asymmetric effects of the Russia-Ukraine geopolitical risk (GPR) on the seven major currencies in terms of the USD-denominated exchange rates. We find that GPR's impact on exchange rates is asymmetric, especially at low and high extremes, currency-specific, and depends on whether the country's legal system is predominantly based on common law or otherwise. Our findings signal the attractiveness of the Euro and the Swiss Franc currencies as a hedge for currency portfolios against GPR. The investment and policy implications of the findings are discussed.

Automated summary

In this nonparametric quantile-on-quantile regression analysis, we find that the impact of Russia-Ukraine geopolitical risk on major currencies' exchange rates is asymmetric, especially at low and high extremes. The impact is also currency-specific and depends on the country's legal system. Our findings suggest that the Euro and the Swiss Franc can serve as attractive hedge currencies against GPR in currency portfolios.