Volatility connectedness on the central European forex markets

• Published in: International review of financial analysis 2024-05, Vol.93, p.103179, Article 103179
• Main Authors: Albrecht, Peter, Kočenda, Evžen
• Format: Article
• Language: English
• Subjects: Asymmetries in volatility connectedness; Bootstrap-after-bootstrap procedure; Central European currencies; Portfolio composition and hedging; Volatility connectedness
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2024.103179

We perform a comprehensive assessment of volatility connectedness between the currencies of Central European (CE) countries using high-frequency data from 2009 to 2022. We provide evidence of asymmetries in connectedness that are dominated by negative volatility, especially during periods of economic distress. We also detect statistically significant economic or political events that lead to increased volatility connectedness. Plus, we document the impact of global shocks, not local ones. Further, the existing lag in the response of the spillover index to stressful events offers an opportunity to effectively hedge foreign exchange risk and to use the CE currencies as hedging tools. Finally, in terms of market-specific factors, liquidity dominates uncertainty as a connectedness driver. Our results are robust with respect to volatility measures and provide direct policy implications for portfolio composition and hedging. •We provide an assessment of volatility connectedness between the currencies of Central European countries from 2009 to 2022.•Asymmetries in connectedness are dominated by negative volatility, especially during periods of economic distress.•We bring the first statistical evidence that increases in connectedness are linked with systematic domestic or global shocks.•For eight endogenously chosen global events, there was an increase in connectedness up to one business month after an event.•Connectedness is linked to uncertainty, liquidity, and economic activity, whose impacts differ substantially.•Our results provide direct policy implications for portfolio composition and hedging.