Modelling the quantile cross-coherence between exchange rates: Does the COVID-19 pandemic change the interlinkage structure?

Abstract

This paper examined the presence of daily returns coherence and spillover between 30 forex markets over the complete sample and crisis sub-periods. We mainly employed the quantile cross-spectral approach of Barunik and Kley (2019) to measure returns coherence among different investment horizons, while returns spillover is examined using the network connectedness approach. During the COVID-19 period, we found evidence supporting the interdependence hypothesis as opposed to the segregation model. This turns out to be significantly more accurate in the long-run horizon period under the 95%|95% return arrangement. In contrast, the global financial crisis is found to bring more diversification benefits for investors under the same arrangement. Furthermore, the results from ESDC-based analysis revealed some similarities with that from COVID-19 due to the absence of clearly significant negative interlinkages between the pairs in the sample. Lastly, the additional network connectedness analysis made the European (Belgian franc) FX market the primary receiver of shocks during the COVID-19 (European and financial) period. Our results carry significant implications for investors and policymakers concerning timely portfolio rebalancing and performing more organized monetary policies, respectively.