Abstract:

With the advancement of financial liberalization and financial integration， the transaction cost of global foreign exchange （FX） markets has been greatly reduced， and the cross-border investment has become more convenient. But at the same time， it has also promoted the risk contagion in the global FX network. Therefore， it is of great significance to study the connectedness change of the FX markets and the network topology evolution at different periods. Using the data of global FX rates of 33 currencies and seven macroeconomic variables from 2011 to 2021 on the pacific exchange rate service website， tail risk spillover network is constructed based on the LASSO‒CoVaR model to measure the currency risk interconnectedness. The network interconnectedness structure of global FX markets during the European debt crisis and the Sino‒US trade friction is emphatically studied， and the dynamic network connectedness is empirically analyzed from the system‒wide， sector‒conditional and individual‒level measures. The empirical results show that： （i） The total connectedness of global FX markets is at a high level during the crisis， and there is an obvious currency clustering effect； （ii） The currencies from Middle East and South America mostly acted as the risk‒recipients and their stability is weak， while the incoming risk strength （in‒strength） and outgoing risk strength （out‒strength） of currencies from Asia and North America are mostly at the same level and their stability is relatively strong； and （iii） The in‒strength and out‒strength of the US dollar and euro are relatively low， suggesting that the fluctuations of global FX markets do not necessarily come from the world’s dominant currencies. The Japanese yen and South Korean won are affected by the political and economic impact of the Sino‒US trade friction after 2018， and their risk spillover strength persistently increased. The risk it received from other currencies has enhanced remarkably， after the Renminbi joined the special drawing rights. Through a comprehensive analysis of the tail risk spillover network in global FX markets， the investment strategies are suggested that investors should be more cautious when investing in currencies from the Middle East and Latin America， and consider more about the impact of the connectedness between the currencies of the United States， Japan， and Europe when constructing an investment portfolio.

Key words: complex financial network, foreign exchange markets, tail risk spillover, interconnectedness, topological features