Trade policy uncertainty and risk spillovers in global currency markets

Purpose This paper examines how trade policy uncertainty (TPU) affects risk transmission in global foreign exchange markets. Design/methodology/approach Using daily data for 20 major currencies from 2005 to 2025, we combine autoregressive exponential generalized autoregressive conditional heteroskedasticity with generalized error distribution (AR-EGARCH-GED) volatility estimates, least absolute shrinkage and selection operator vector autoregression (LASSO-VAR) connectedness measures, and a generalized autoregressive conditional heteroskedasticity mixed-data sampling (GARCH-MIDAS) framework that links monthly TPU to daily return and volatility spillovers. Findings The results show that global FX markets are highly interconnected, with average return connectedness of 71.3% and volatility connectedness of 58.46%. Spillovers are time-varying and rise around major stress episodes, including the global financial crisis, Brexit, the USA–China trade war, the COVID-19 pandemic, and renewed trade-policy tensions in 2024–2025. The results also reveal a core-periphery structure: the Singapore dollar and the euro frequently act as important transmitters, while several emerging-market currencies mainly absorb external shocks. The US dollar appears relatively balanced on average, but its large two-way linkages confirm its continuing systemic role, especially during stress periods. Originality/value This study develops a novel analytical framework that integrates the AR-EGARCH-GED model, LASSO-VAR spillover indices, and the GARCH-MIDAS approach. Using data on 20 major global currencies, we quantify heterogeneous effects of TPU, identify core and vulnerable currencies in the spillover network, and uncover the mechanisms through which TPU transmits across currency markets. The findings provide a theoretical foundation for policymakers seeking to mitigate TPU-related risks and promote financial stability, while also offering practical insights for international investors to optimize portfolio allocation and manage exchange rate exposure.