The impact of Euro through time: Exchange rate dynamics under different regimes

In this study, we examine the role of the Euro in currency co‐movements and contagion considering the USD exchange rates of six major currencies (i.e., EUR[DM], JPY, GBP, CHF, AUD, as well as, CAD). We identify five distinct intervals, each one corresponding to a different exchange rate regime or reflecting diverse economic developments. First, we model conditional volatility by introducing a novel DCC‐GARCH‐Copula model (based on GARCH selection criteria). Then, we investigate conditional volatility connectedness employing a Bayesian TVP‐(Pseudo)FAVAR model. This approach effectively refines existing measures of dynamic connectedness. Findings suggest strong co‐movements that differ across regimes. In addition, the EUR becomes weaker following both the collapse of Lehman Brothers and the decision for the first Economic Adjustment Programme for Greece. Following the announcement of the result of the EU referendum the GBP eventually receives influence from the EUR. Results remain robust to a series of tests.