Informational linkages among the major currencies in the EBS market: Evidence from the spot rates of the Euro, Yen and Swiss franc

Using high-frequency data on the Euro, Yen and Swiss franc, this paper examines whether the permanent (informational) component of one currency's variance explains the variances of the other currencies as well. Previous studies have not considered this interdependency among currencies. A variance decomposition shows that trade-correlated news on the Euro effectively contributes to the variance of the Swiss franc. In addition, for these two currencies, non-trade-correlated news on one currency reciprocally affects the other. The findings suggest that prior studies may have overestimated the impact of trade-correlated news about a currency on its own permanent variance.

► I model interdependency and causality among the Euro, Yen and Swiss franc. ► I measure the effects of the news regarding one currency on the other currencies. ► The influence of NCK news on variance is lower has been previously reported. ► Research should model interdependency and causality explicitly for these markets.