An unconventional FX tail risk story

We examine how the tail risk of currency returns over the past 20 years were impacted by central bank monetary and liquidity measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.

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Publication Details

Journal
Journal of International Money and Finance
Published
2024-08-13
DOI
https://doi.org/10.1016/j.jimonfin.2024.103152
Citations
1
Primary Topic
Market Dynamics and Volatility
Type
article
Field-Weighted Citation Impact
1.13

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article

An unconventional FX tail risk story

Alberto Pambira, Eddie Gerba, Evarist Stoja, Carlos Cañon
1 citations
Journal of International Money and Finance
Market Dynamics and Volatility
1.13
article

An unconventional FX tail risk story

Alberto Pambira, Eddie Gerba, Evarist Stoja, Carlos Cañon
article en
1 citations

Abstract

We examine how the tail risk of currency returns over the past 20 years were impacted by central bank monetary and liquidity measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.

Journal of International Money and FinanceVol. 148
King's College London (GB), University of Bristol (GB), Bank of England (GB)
Economic and Social Research Council
Openalex Percentile: Top 12%
Market Dynamics and Volatility
1.13
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