Working Paper: CEPR ID: DP7472
Authors: Michael Melvin; Mark P. Taylor
Abstract: We provide an overview of the important events of the recent global financial crisis and their implications for exchange rates and market dynamics. Our goal is to catalogue all that was truly of major importance in this episode. We also construct a quantitative measure of crises that allows for a comparison of the current crisis to earlier events. In addition, we address whether one could have predicted costly events before they happened in a manner that would have allowed market participants to moderate their risk exposures and yield better returns from currency speculation.
Keywords: financial crisis; foreign exchange market
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| volatility in fixed income and equity portfolios (G12) | deleveraging in currency portfolios (F31) |
| global financial crisis (F65) | unwinding of carry trades (F32) |
| unwinding of carry trades (F32) | massive losses for currency investors (F31) |
| subprime mortgage crisis (G01) | carry trade unwinding (F31) |
| financial stress index (FSI) (G21) | probability of significant losses in currency speculation (F31) |
| FSI levels (N20) | drawdowns in carry trade investments (F32) |