Volatility spillovers in forex markets and the role of quantitative easing

This research aims to investigate the volatility spillover relationship among 20 major currencies, using a dataset of 5-minute exchange rates over the 2012–2023 period. Its contribution is based on the combination of both asymmetric and time–frequency aspects while including a regression analysis to examine the impact of the COVID-19 pandemic and quantitative easing on this volatility spillover. The empirical results show a high degree of volatility spillovers in the foreign exchange market, especially for currencies in the same geographical area. These volatility spillovers were highest during the first wave of the COVID-19 pandemic in early 2020, much higher than at the start of the Ukraine-Russia war in early 2022. Significantly, the COVID-19 pandemic only affects negative volatility spillovers. In addition, quantitative easing is an important determinant of volatility spillovers in the foreign exchange market. However, its effect on volatility spillovers differs across time horizons, being negative in the short run and positive in the long run. This finding implies that policymakers should consider the long-term effects of quantitative easing when designing such a policy and when using it as a short-term solution in times of crisis.