Downside risk and flight to quality in the currency market

Some currencies systematically crash together with the stock market, while others serve as a „safe haven‟. This paper studies which country macroeconomic fundamentals are consistently related to the riskiness of its currency. I look at various macroeconomic variables and find that high real interest rates in a country are associated with high downside risk of its currency, while inflation rate, nominal interest rate and other variables are not that relevant. But to be a „safe haven‟ currency, both low real interest rate and low inflation rate are required. I suggest that there is a „flight to quality‟ in the currency market when the stock market goes down.

Author: Victoria , Dobrynskaya
Volume: 2011.5
Publisher: INFER
Year: 2011
No. of pages: 22
Working papers