Currency Connectedness Between Developed and Emerging Markets: A TVP-VAR-Based Analysis

This study examines currency connectedness between developed and emerging market economies from a dynamic perspective, aiming to fill a significant gap in the literature. While existing research predominantly focuses on developed economies, this study highlights the growing influence of emerging market currencies within the global financial system. The analysis employs currency indices—namely the U.S. Dollar Index (DXY), Euro Index (InvEUR), and Swiss Franc Index (CHF)—to represent developed markets, alongside the MSCI Emerging Markets Currency Index (MSCI EM) to capture emerging market dynamics. By using currency indices instead of individual exchange rates, the study offers a more holistic and comprehensive analysis. A high-frequency dataset spanning the period from May 12, 2023, to April 16, 2025, is utilized. The analysis, conducted using the TVP-VAR-based Dynamic Connectedness Index methodology, reveals that the interconnectedness among currencies intensifies notably during periods of financial uncertainty, though remains limited in the broader sample. The total connectedness level is empirically calculated at 24%, indicating that 24% of currency volatility is attributable to external shocks. Furthermore, the decline in volatility spillovers observed from the second half of 2023 onward is interpreted as a significant indicator of reduced financial contagion and improved market functioning.