Contagion effects of U.S. Dollar and Chinese Yuan in forward and spot foreign exchange markets

Financial contagion in forex markets is modeled by the application of a bivariate Hawkes stochastic jump process. The self-exciting and mutually exciting properties of the jump-clustering model allow for illustrating internal and cross-sectional transmission processes. The results obtained suggest stronger effects from US to mutual markets than in the reverse case. Cross-sectional excitation dynamics in the spot markets are larger than in the forward markets. As a central result, we can observe that the results for the Hawkes-model parameters are more significant in the forward markets. Transmission dynamics beyond volatility determine the likelihood of contagion occurrence. The significance of the decay parameters towards the long term jump intensities supports the importance of abrupt fluctuations in the contagion discourse.