A FICC-study on return spillover - Case study: Norway

Abstract

During periods of downward turns, and high volatility, there is an associated increase in individual asset risk, as well as effects stemming from the volatility of other assets. This spillover effect is well studied for equites and portfolio assets. In this thesis we investigate the presence of return spillover for fixed income, commodities, and currencies (FICC assets) over the past 20-years, using Norway as a case study. We develop a general framework using Archimedean copulas as a statistical method for modelling the tail-dependencies between Brent oil price, the exchange rate of the U.S. Dollar (USD) to the Norwegian Krone (NOK) and the terms of the Norwegian Inter-Bank Offered Rates (NIBOR). Further, we investigate whether the discovered spillover and dependence structure varies across sub-samples of four-year periods.

The results of the analysis indicate that there are some dependency structures present between these markets, and there are cases of significant return spillover. Concretely, the analysis found a negative tail-end correlation between Brent oil prices and USD/NOK exchange rate, a relatively small dependence between NIBOR terms and Brent oil prices, and lastly, varying dependence structures between the NIBOR terms and the USD/NOK exchange rate, both over periods of varying economic movements and the terms themselves. The analysis also found the strongest interactions to occur in times associated with high volatility and global economic turmoil.