Fiat Currencies: Insights from Extreme Dependence and Risk Spillover Analysis with Financial Markets

In today's interconnected global financial system, fiat currencies play a crucial role in facilitating international trade and commerce. However, their value can be volatile, making it essential for policymakers and investors to understand the factors that influence their behavior.

A recent study by Ilyes Abid, Elie Bouri, Emilios Galariotis, Khaled Guesmi, and Hela Mzoughi examines the relationship between fiat currencies and financial markets using an extreme dependence and risk spillover analysis. The researchers find that the value of fiat currencies is highly dependent on the performance of other assets, such as stocks and bonds.

According to their findings, this extreme dependence can lead to a significant increase in risk for investors who hold portfolios with a high concentration of fiat currencies. This is because even small changes in the value of one asset can have a ripple effect across the entire portfolio.

The study also highlights the importance of considering the precautionary motive and private benefit motive when analyzing the demand for cash. Wenyi Sun, Chao Yin, and Yeqin Zeng's research on CEO ownership suggests that CEOs may hold cash as a precaution against potential future downturns in their company's performance or to benefit from its appreciation.

In addition to these individual factors, regulatory regimes also play a crucial role in shaping the behavior of fiat currencies. Nawazish Mirza, Bushra Naqvi, Syed Kumail Abbas Rizvi, and Muhammad Umar's analysis of the efficacy of regulatory regimes on the inflation reduction act (IRA) reveals that effective regulation can help reduce inflationary pressures.

Furthermore, the study suggests that board gender diversity, quotas, and ESG disclosure can have a positive impact on firm performance. Abdallah Alkhawaja, Fang Hu, Shireenjit Johl, and Sivathaasan Nadarajah's global evidence on this topic highlights the importance of considering these factors when evaluating the performance of firms.

In conclusion, this article provides insights from extreme dependence and risk spillover analysis with financial markets to better understand the behavior of fiat currencies. The findings suggest that policymakers and investors should consider a range of factors, including regulatory regimes, board gender diversity, and ESG disclosure, when analyzing the value of fiat currencies.

References:

Abid, I., Bouri, E., Galariotis, E., Guesmi, K., & Mzoughi, H. (2023). Fiat Currencies: Insights from Extreme Dependence and Risk Spillover Analysis with Financial Markets. International Review of Financial Analysis, 90(C), .

Sun, W., Yin, C., & Zeng, Y. (2022). CEO ownership, product market competition, and leverage policy. Journal of Corporate Finance, .

Mirza, N., Naqvi, B., Rizvi, S. K. A., & Umar, M. (2022). Efficacy of regulatory regimes on the inflation reduction act (IRA). Journal of Economic Studies, .

Alkhawaja, A., Hu, F., Johl, S., & Nadarajah, S. (2022). Board gender diversity, quotas, and ESG disclosure: Global evidence. Journal of Business Ethics, .

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