Contagion across exchange rates

Abstract

Purpose The purpose of this paper is to investigate contagion across eight major exchange rates by providing more information on the role of information spillovers. Design/methodology/approach The empirical analysis makes use of two methodologies that capture channels of contagion. Such methodologies explicitly consider information spillovers characterized by the response of currency markets to real-time macroeconomic surprises, i.e., divergences between expectations and realizations. Findings The empirical findings denote the presence of contagion effects, originating from information spillovers. Practical implications The empirical findings provide insight about how to derive appropriate policy responses, which are crucial for policymakers to understand the source and nature of such exposures, while this insight might have some bearing with respect to the choice of an exchange-rate regime. The results from this paper may also have implications for investors in relevance to portfolio re-balancing and the construction of optimal portfolio diversification strategies. Originality/value This is the first empirical attempt that explores the role of informational spillovers in exchange rate markets and also explores the employment of advanced econometric methodologies to satisfy the above research goal.