Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index
AbstractWe model the joint distribution between the euro-sterling and the dollar-sterling exchange rate using option-implied markginal distributions that are connected via a copula function. We then derive univariate distributions for the simpliefied sterling effective exchange rate index (ERI). Our results indicate that simple parametric copula functions, such as the commonly used Normal and Frank copulas, fail to capture the degree of asymmetry observed in the data. We overcome this problem by using a non-parametric dependence function in the form of a Bernstein copula
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 215.
Date of creation: 11 Nov 2005
Date of revision:
copula functions; option implied densities; effective exchange rates;
Other versions of this item:
- Hurd, Matthew & Salmon, Mark & Schleicher, Christoph, 2005. "Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index," CEPR Discussion Papers 5114, C.E.P.R. Discussion Papers.
- Matthew Hurd & Mark Salmon & Christoph Schleicher, 2007. "Using copulas to construct bivariate foreign exchange distributions with an application to the sterling exchange rate index," Bank of England working papers 334, Bank of England.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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