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Latin American Exchange Rate Dependencies: A Regular Vine Copula Approach

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  • Rubén Albeiro Loaiza Maya

    ()

  • José Eduardo Gómez-González

    ()

  • Luis Fernando Melo Velandia

    ()

Abstract

This study implements a regular vine copula methodology to evaluate the level of contagion among the exchange rates of six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru) from June 2005 to April 2012. We measure contagion in terms of tail dependence coefficients, following Fratzscher’s (1999) definition of contagion as interdependence. Our results indicate that these countries are divided into two blocs. The first bloc consists of Brazil, Colombia, Chile and Mexico, whose exchange rates exhibit the largest dependence coefficients, and the second bloc consists of Argentina and Peru, whose exchange rate dependence coefficients with other Latin American countries are low. We also found that most of the Latin American exchange rate pairs exhibit asymmetric behaviors characterized by non-significant upper tail dependence and significant lower tail dependence. These results imply that there exists contagion in Latin American exchange rates in periods of large appreciations, while there is no evidence of contagion during periods of currency depreciation. This empirical regularity may reflect the “fear of appreciation” in emerging economies identified by Levy-Yeyati, Sturzenegger, and Gluzmann [2013].

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 729.

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Length: 23
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:bdr:borrec:729

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Keywords: Copula; Regular Vine; Exchange Rates; Tail Dependence Coefficients. Classification JEL:C32; C51; E42.;

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  1. Orlov, Alexei G., 2009. "A cospectral analysis of exchange rate comovements during Asian financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 742-758, December.
  2. Oscar Becerra & Luis Fernando Melo, 2008. "Medidas De Riesgo Financiero Usando Cópulas: Teoría Y Aplicaciones," BORRADORES DE ECONOMIA 004523, BANCO DE LA REPÚBLICA.
  3. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
  4. Sigridur Benediktsdottir & Chiara Scotti, 2009. "Exchange rates dependence: what drives it?," International Finance Discussion Papers 969, Board of Governors of the Federal Reserve System (U.S.).
  5. Meltem Gulenay Chadwick & Fatih Fazilet & Necati Tekatli, 2012. "Common Movement of the Emerging Market Currencies," Working Papers 1207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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