Asymmetric volatility connectedness on forex markets

TL;DR

This paper investigates how positive and negative volatility propagate differently across forex markets, revealing that bad news causes more spillovers and linking these asymmetries to specific economic crises and policy events.

Contribution

It provides the first empirical evidence of asymmetric volatility spillovers in forex markets using high-frequency data from 2007-2015.

Findings

Negative spillovers linked to European sovereign debt crisis

Positive spillovers associated with subprime crisis and monetary policies

Asymmetries driven by economic and fiscal factors

Abstract

We show how bad and good volatility propagate through forex markets, i.e., we provide evidence for asymmetric volatility connectedness on forex markets. Using high-frequency, intra-day data of the most actively traded currencies over 2007 - 2015 we document the dominating asymmetries in spillovers that are due to bad rather than good volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the net positive asymmetries in volatility spillovers, while fiscal factors are linked with net negative spillovers.