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Extremal Dependence In Exchange Rate Markets

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  • Viviana Fernandez

Abstract

Exchange rate markets exhibit correlation in the short run, but the issue is whether such correlation lingers over long periods of time, and under extreme events (i.e., either large appreciations or depreciations). In this paper, we analyze dependence between nominal exchange rates under extreme events for a sample of ten countries with dirty/free float regimes over the period 1998-2002. In addition, we investigate whether currencies have exhibited extremal dependence on the Euro, since its adoption in 1999. Our findings are the following. First, in general, there is no evidence of extremal dependence between returns pairs. Second, the degree of dependence is stronger under large appreciations than under large depreciations. These conclusions are robust to filtering out the data for serial correlation and heteroscedasticy.

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File URL: http://repec.org/esLATM04/up.15940.1079222825.pdf
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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 13.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:13

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Keywords: extremal dependence; DVEC models;

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  1. Poon, Ser-Huang & Rockinger, Michael & Tawn, Jonathan, 2001. "New Extreme-Value Dependence Measures and Finance Applications," CEPR Discussion Papers 2762, C.E.P.R. Discussion Papers.
  2. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  3. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
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