Health crisis and currency risk: Fresh evidence from new data sets

With the aid of a method of predictability analysis that involves a feasible quasi-generalized least squares estimator, we examine the predictive power associated with the newly constructed COVID-19 indices, which are disaggregated into medical, travel, vaccine, uncertainty, COVID and aggregate COVID indices for currency market risks (realized volatility of exchange rate). Our sample size covers the period between December 31, 2019 (when the first case of COVID-19 was put on record) and December 28, 2021. We note mixed outcomes for the major currency markets considered. On average, while the health crisis seems to have heightened the risks associated with Pounds Sterling (GBP/USD), Australian Dollar (AUD/USD) and Canadian Dollar (CAD/USD), it exerts a moderating effect on the Euro (EUR/USD), Yen (JPY/USD) and Swiss Franc (CHF/USD). Nonetheless, the predictive value of the indices is sustained over multiple out-of-sample forecasts, and we attribute this outcome to the information contents of the new measures of the COVID-19 pandemic.