Systemic Risk between Carry Trade and Stock Market ()
ABSTRACT
In this paper, we exploit the impacts of extreme
asset prices (high-low ranges) on multiple horizons and use a conditional
value-at-risk (CoVaR) model to
evaluate the degree of risk contagion between stock markets and carry-trade
markets. We associate the systemic risk of a financial market with conditions
in related markets during periods of crisis. The model can be empirically
applied to diversified portfolio strategies, but the systemic risk involved is
conditional on closely related financial
markets. Most notably, our evidence shows that this propagating effect
was significant during the 2000-2001 tech bubble and 2007-2009 global financial
crisis periods and not reveal negligible risk spillover effect during the
2015-2016 Brexit (British exit from European Union) and potential possible
Grexit (Greece’s potential exit from European Union) periods. Moreover, the CoVaR value is shown to be a strong
alternative indicator of risk management and asset allocation, especially for
investments in carry-trade and stock markets.
Share and Cite:
Yang, H. , Liu, C. and Liu, H. (2021) Systemic Risk between Carry Trade and Stock Market.
Theoretical Economics Letters,
11, 522-539. doi:
10.4236/tel.2021.113035.
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