A new way of measuring effects of financial crisis on contagion in currency markets

Abstract

Contagion is an extremely important topic in finance. Contagion is at the core of most major financial crises, in particular the global financial crisis that started in 2007. Although various approaches to quantifying contagion have been proposed, many of them lack a causal interpretation. We will present a new measure for contagion among individual currencies within the Foreign exchange market and show how the paths of contagion work within the Forex market using causal inference. This approach will allow us to pinpoint sources of contagion and to find which currencies offer good options for diversification and which are more susceptible to systemic risk, ultimately resulting in feedback on the level of global systemic risk. A special notice is given to the effects of the Covid-19 global pandemic.