Extreme linkages between foreign exchange and general financial markets

This study investigates the dynamic linkages between foreign exchange and general financial markets using asymmetric time-varying copula models for the developed markets of G7 countries. We also examine the extreme spillover effects from foreign exchange markets to general financial markets by the copula-based CoVaR approach. The copula estimations reveal asymmetric tail dependence and a positive (negative) dependence between currency and stock markets in Canada (Japan and the United States); a positive (negative) dependence between currency and bond markets in Japan (Canada and the United States). Furthermore, this study observes both the downside and upside spillovers in most of the G7 countries; the evidence of downside spillover is more prevalent than the upside spillover, especially for the stock market. The results indicate that these spillovers are generally asymmetric, namely, the downside spillovers are significantly greater than the upside spillovers. These findings are relevant for international investors and policy makers.