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    FX Market Returns and Their Relationship to Investor Fear

    247600.pdf (1.116Mb)
    Access Status
    Open access
    Authors
    Smales, Lee
    Kininmonth, J.
    Date
    2016
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Smales, L. and Kininmonth, J. 2016. FX Market Returns and Their Relationship to Investor Fear. International Review of Finance. 16 (4): pp. 659-675.
    Source Title
    International Review of Finance
    DOI
    10.1111/irfi.12083
    ISSN
    1369-412X
    School
    Curtin Graduate School of Business
    Remarks

    This is the peer reviewed version of the following article: Smales, L. and Kininmonth, J. 2016. FX Market Returns and Their Relationship to Investor Fear. International Review of Finance. 16 (4): pp. 659-675, which has been published in final form at http://doi.org/10.1111/irfi.12083 This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving at http://olabout.wiley.com/WileyCDA/Section/id-828039.html

    URI
    http://hdl.handle.net/20.500.11937/48333
    Collection
    • Curtin Research Publications
    Abstract

    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.

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