The Markov-switching drivers of foreign exchange rate comovements in the case of CEE countries

Mészáros, Mercédesz and Sallai, Dóra and Kiss, Gábor Dávid (2023) The Markov-switching drivers of foreign exchange rate comovements in the case of CEE countries. INTERNATIONAL JOURNAL OF MONETARY ECONOMICS AND FINANCE, 17 (5). pp. 393-412. ISSN 1752-0479

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Abstract

Significant foreign exchange market turbulences have emerged in recent years, which makes it worthwhile to monitor the co-movements of the exchange rates which are influenced by the variables of macroeconomic and financial environment. Regarding the effects of market contagion after exogenous shocks, it is also essential to capture the less examined elements linked to this like the measures of unconventional monetary policy. Fitting a Dynamic Conditional Correlation and Markov-Switching models to the sample of the Czech, Hungarian and Polish foreign exchange markets we analysed whether their currencies moved together with their euro area benchmarks between 2007 and 2020. Our results showed the heterogeneity of the regional currencies. In addition, the research finding is that regime-changes revealed more similarities in case of the Polish and Hungarian currencies than what we were able to identify in the case of CZK.

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