Measuring exchange rate risks during periods of uncertainty

In this paper, we empirically look at the effects of uncertainty on risk measures for
exchange rates, by focusing on two recent specific periods: the Brexit and the outbreak
of the Covid-19. Based on a Fama regression extended with uncertainty measures, we
forecast exchange rate in the short run through a quantile regression approach. By fitting
a Skewed-Student distribution to the quantile forecasts, we put forward measures of risks
for appreciation and depreciation of the expected exchange rates. We point out two
interesting results. First, we show that the increase in Brexit-related uncertainty is strongly
associated to higher future depreciation risks of the British Pound vs the Euro, as a
mistrust towards the British economy. Second, we get that the Covid-related uncertainty
is perceived as a global risk, leading to a flight-to-safety move towards the US Dollar and
associated high depreciation risks for emerging currencies.