Abstract
Dynamic Currency Linkages and its Determinants: An Empirical Study for East Asian Economic Community Region by Piyush Pandey In this paper, we examine the currency market linkages between ASEAN+6 countries (referred to in this study as East Asian Economic Community) and ASEAN+6 currency market index. The daily data for foreign exchange returns is used from the period 3rd January 2000 to 31st March 2016. Copula GARCH models have been employed to study the inter-temporal process of currency market co-movements. Empirical results show that the sample countries of the region exhibit varying levels of co-movements with the Asian benchmark the highest of which is shown by the Japanese Yen which proves its dominance in international trade and commerce. Markov Regime Switching results show that many of the countries which had high dependences between their currencies with the regional currency index as was found in copula estimations had also overlapping currency market cycles thereby pointing towards market synchronization. Using Principal Component Analysis, we find that three statistical factors explain exchange rate co-movements. Our Economic Analysis based on panel data estimation provides similar results. Three fundamental determinants namely Fiscal Discipline, Trade Linkages and Currency Market Openness seem to drive exchange rate dependences. Our findings are relevant for policymakers, business firms, investors and academia.Keywords: currency market linkages, time varying copula, markov regime switching, market synchronization, panel data analysis