Abstract
In this paper, we exploit the impacts of extreme asset prices (high-low ranges) on multiple horizons and use a conditional value-at-risk (CoVaR) model to evaluate the degree of risk contagion between stock markets and carry-trade markets. We associate the systemic risk of a financial market with conditions in related markets during periods of crisis. The model can be empirically applied to diversified portfolio strategies, but the systemic risk involved is conditional on closely related financial markets. Most notably, our evidence shows that this propagating effect was significant during the 2000-2001 tech bubble and 2007-2009 global financial crisis periods and not reveal negligible risk spillover effect during the 2015-2016 Brexit (British exit from European Union) and potential possible Grexit (Greece’s potential exit from European Union) periods. Moreover, the CoVaR value is shown to be a strong alternative indicator of risk management and asset allocation, especially for investments in carry-trade and stock markets.
Highlights
The investment strategies of financial market usually balance risk and rewards by adjusting asset allocation that is highly related to the investment holding period
We exploit the impacts of extreme asset prices on multiple horizons and use a conditional value-at-risk (CoVaR) model to evaluate the degree of risk contagion between stock markets and carry-trade markets
By providing a CoVaR value estimated with extreme asset prices on multiple horizons, this study finds extra evidence to clarify the controversy of financial volatility with these two range-based data in stock markets (Chou et al, 2010)
Summary
The investment strategies of financial market usually balance risk and rewards by adjusting asset allocation that is highly related to the investment holding period. Lan et al (2018) suggest that stocks held primarily by long-horizon funds outperform stocks held mainly by short-horizon funds. Cella et al (2013) suggest that investors with short horizons amplify the effects of market-wide negative shocks by demanding capital liquidity. These results highlight the importance of the investment horizon in determining risk exposure and the asset pricing effects of liquidity (Beber et al, 2021; Kamara et al, 2016)
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