Systemic risk in global FX markets: Measurement and determinants

Abstract

This paper examines systemic risk in global foreign exchange (FX) markets using a dynamic skew-$t$ factor copula model for 36 currencies from 2015 to 2024. We document significant time variation in systemic risk with pronounced spikes during major global disruptions. Exchange rate regimes significantly influence currency vulnerability, with floating and intermediate regimes providing better insulation against systemic risk than fixed regimes. We identify an inverted U-shaped relationship between global economic integration and currency vulnerability: initial trade and FDI integration increases vulnerability until reaching critical thresholds, beyond which deeper integration reduces vulnerability. These findings have important implications for systemic risk management in increasingly interconnected FX markets.