Tail risk spillovers among ASEAN-6 forex markets

Abstract

Factors affecting exchange rates, such as interest rates, trade balance, inflation, and demand for investment and currency speculation, could significantly change during extreme conditions. Compared to the USD, the local currencies of ASEAN-6 countries are more likely to depreciate during such scenarios due to the economic and geopolitical crises in the US and the international investors' confidence in the USD. Therefore, examining the phenomenon of contagion in the foreign exchange markets in these countries is an important topic that needs to be clarified. This study aims to explore tail risk spillover in the ASEAN-6 foreign exchange markets, including Vietnam (VND), Thailand (THB), the Philippines (PHP), Indonesia (IDR), Malaysia (MYR), and Singapore (SGD) during the period from 2018 to 2024 using the TENET model (Tail-Event driven NETwork risk). The results indicate that the level of tail risk spillover in these economies increases significantly during global financial crises, including the US-China trade war, the COVID-19 pandemic, and the Russia-Ukraine war. However, when considering the average level of tail risk spillover, the impact is relatively low (3.60%), suggesting potential for diversification in the foreign exchange markets of the ASEAN-6 countries. Notably, the foreign exchange markets of Vietnam and the Philippines do not experience significant tail risk spillover from other foreign exchange markets. In contrast, the pairs of Thailand-Singapore and Indonesia-Malaysia exhibit significant bilateral tail risk spillover effects.