FX Market Returns and Their Relationship to Investor Fear
This note examines the relationship between changes in levels of investor fear (measured by the implied volatility index) and foreign exchange market returns. Our empirical results indicate a negative relationship between daily returns on high-interest rate (investing) currencies and changes in the...
| Main Authors: | , |
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| Format: | Journal Article |
| Published: |
Wiley-Blackwell Publishing Asia
2016
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| Online Access: | http://hdl.handle.net/20.500.11937/48333 |
| _version_ | 1848758080167215104 |
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| author | Smales, Lee Kininmonth, J. |
| author_facet | Smales, Lee Kininmonth, J. |
| author_sort | Smales, Lee |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | This note examines the relationship between changes in levels of investor fear (measured by the implied volatility index) and foreign exchange market returns. Our empirical results indicate a negative relationship between daily returns on high-interest rate (investing) currencies and changes in the implied volatility index, while the association is positive for low-interest rate (funding) currencies. That is, investing (funding) currencies tends to depreciate (appreciate) when investor fear increases. A sequential breakpoint test identifies a significant change in this relationship in the period following the 2008 collapse of Lehman Brothers, and another in 2012 following the resolution of the European sovereign debt crisis, which suggests that the relationship is linked to financial system liquidity. During the crisis period, currency returns are much more sensitive to changes in investor fear, and this is particularly so for funding currencies that are perceived to present a safe-haven. The results have important implications for international finance, and those looking to speculate via the carry trade. |
| first_indexed | 2025-11-14T09:38:18Z |
| format | Journal Article |
| id | curtin-20.500.11937-48333 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T09:38:18Z |
| publishDate | 2016 |
| publisher | Wiley-Blackwell Publishing Asia |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-483332019-02-19T05:35:17Z FX Market Returns and Their Relationship to Investor Fear Smales, Lee Kininmonth, J. This note examines the relationship between changes in levels of investor fear (measured by the implied volatility index) and foreign exchange market returns. Our empirical results indicate a negative relationship between daily returns on high-interest rate (investing) currencies and changes in the implied volatility index, while the association is positive for low-interest rate (funding) currencies. That is, investing (funding) currencies tends to depreciate (appreciate) when investor fear increases. A sequential breakpoint test identifies a significant change in this relationship in the period following the 2008 collapse of Lehman Brothers, and another in 2012 following the resolution of the European sovereign debt crisis, which suggests that the relationship is linked to financial system liquidity. During the crisis period, currency returns are much more sensitive to changes in investor fear, and this is particularly so for funding currencies that are perceived to present a safe-haven. The results have important implications for international finance, and those looking to speculate via the carry trade. 2016 Journal Article http://hdl.handle.net/20.500.11937/48333 10.1111/irfi.12083 Wiley-Blackwell Publishing Asia fulltext |
| spellingShingle | Smales, Lee Kininmonth, J. FX Market Returns and Their Relationship to Investor Fear |
| title | FX Market Returns and Their Relationship to Investor Fear |
| title_full | FX Market Returns and Their Relationship to Investor Fear |
| title_fullStr | FX Market Returns and Their Relationship to Investor Fear |
| title_full_unstemmed | FX Market Returns and Their Relationship to Investor Fear |
| title_short | FX Market Returns and Their Relationship to Investor Fear |
| title_sort | fx market returns and their relationship to investor fear |
| url | http://hdl.handle.net/20.500.11937/48333 |