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Modelling the Dependence Structure of MUR/USD and MUR/INR Exchange Rates using Copula

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Author Info

  • Vandna Jowaheer

    (University of Mauritius, Faculty of Science, Reduit, Mauritius)

  • Nafeessah Z. B. Ameerudden

    (University of Mauritius, Reduit, Mauritius)

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    Abstract

    American Dollar (USD) and Indian Rupee (INR) play an important role in Mauritian economy. It is important to model the pattern of dependence in their co-movement with respect to Mauritian Rupee (MUR), as this may indicate the export-import behavior in Mauritius. However, it is known that distributions of exchange rates are usually non-normal and the use of linear correlation as a dependence measure is inappropriate. Moreover it is quite difficult to obtain the joint distribution of such random variables in order to specify the complete covariance matrix to measure their dependence structure. In this paper, we first identify the marginal distributions of the exchange rates of MUR against USD and INR and then select the best fitting copula model for the bivariate series. It is concluded that both the series are asymmetric and fat-tailed following hyperbolic distribution. Their dependence structure is appropriately modeled by t copula.

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    Bibliographic Info

    Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

    Volume (Year): 2 (2012)
    Issue (Month): 1 ()
    Pages: 27-32
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    Handle: RePEc:eco:journ1:2012-01-4

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    Related research

    Keywords: Dependence structure; Exchange rates; Hyperbolic Distribution;

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    References

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    1. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc.
    2. Boothe, Paul & Glassman, Debra, 1987. "The statistical distribution of exchange rates: Empirical evidence and economic implications," Journal of International Economics, Elsevier, vol. 22(3-4), pages 297-319, May.
    3. Andrew Patton, 2004. "Modelling Asymmetric Exchange Rate Dependence," Working Papers wp04-04, Warwick Business School, Financial Econometrics Research Centre.
    4. McFarland, James W & Pettit, R Richardson & Sung, Sam K, 1982. " The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement," Journal of Finance, American Finance Association, vol. 37(3), pages 693-715, June.
    5. Andrew J. Patton, 2008. "Copula-Based Models for Financial Time Series," OFRC Working Papers Series 2008fe21, Oxford Financial Research Centre.
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