A Global Perspective on Extreme Currency Linkages

Abstract

We apply new methods of extreme value analysis to discuss the size and likelihood of extreme currency returns and particularly of extreme co-movements between currencies. The sample covers the four main industrial country currencies and 10 emerging market currencies from altogether 4 continents between 1980 and 2001. The univariate analysis conÞrms the conventional wisdom that emerging market country currencies clearly exhibit larger and more frequent extreme returns than the industrial country currencies. However, the bivariate analysis suggests that once a crisis has struck, the breadth of it across currencies is not more severe among emerging markets than among industrial countries. Hence, somewhat surprisingly these results imply that currency contagion is not more severe for emerging economies than for industrial economies, although crisis situations as such are more frequent in the latter group. We also Þnd extreme negative co-movements among East Asian currencies to be much more pronounced than among South Amerian currencies. Finally, we do not Þnd evidence in favour of frequent extreme negative spillovers between industrial country and emerging market currencies.

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