Contagion Effects of U.s. Dollar and Chinese Yuan in Forward and Spot Foreign Exchange Markets

Abstract

Financial contagion in forex markets is modeled by the application of a bivariate Hawkes stochastic jumpprocess. The self-exciting and mutually exciting properties of the jump-clustering model allow for illustratinginternal and cross-sectional transmission processes. The results obtained suggest stronger effects from US tomutual markets than in the reverse case. Cross-sectional excitation dynamics in the spot markets are larger thanin the forward markets. As a central result, we can observe that the results for the Hawkes-model parameters aremore significant in the forward markets. Transmission dynamics beyond volatility determine the likelihood ofcontagion occurrence. The significance of the decay parameters towards the long term jump intensities supportsthe importance of abrupt fluctuations in the contagion discourse.