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Getting Beyond Carry Trade: What Makes A Safe Haven Currency?

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Executive Summary

There is already a substantial literature documenting the fact that low yield currencies typically appreciate during times of global financial stress and behave as safe havens. The main objective of this paper is to find out what the fundamentals of safe haven currencies are. The authors analyse a large panel of 52 currencies in advanced and emerging countries over almost 25 years of data. They find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and to a lesser extent the absolute size of the stock market, an indicator of market size and development.

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