What Makes a Safe Haven? Equity and Currency Returns for Six OECD Countries during the Financial Crisis

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We estimate dynamic conditional correlations (DCCs) between equity and currency returns during the financial crisis using Engle's (2002) model. DCCs and their volatilities increased for all countries, increasing investors' risk aversion and leading to the "flight-to-quality". The US, Japan, and Switzerland have negative DCCs, making them "safe havens" that experienced capital inflows, whereas the UK, Australia, and Canada have positive DCCs. Stock and foreign exchange volatility indexes increase DCCs for countries without safe assets; however, they decrease DCCs for countries with safe assets. Higher country-specific risk, as measured by its TED spread, and CDS spread, means higher DCCs.
Publisher
WUHAN UNIV JOURNALS PRESS
Issue Date
2016-11
Language
English
Article Type
Article
Keywords

STOCK-MARKET VOLATILITY; EXCHANGE-RATE DYNAMICS; UNIT-ROOT HYPOTHESIS; CARRY TRADE; CAPITAL FLOWS; TIME-SERIES; RATE RISK; MODELS; RATES; PRICES

Citation

Annals of Economics and Finance, v.17, no.2, pp.365 - 402

ISSN
1529-7373
URI
http://hdl.handle.net/10203/214860
Appears in Collection
RIMS Journal Papers
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