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A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach

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  • Wang, Yi-Chiuan
  • Wu, Jyh-Lin
  • Lai, Yi-Hao

Abstract

This paper develops a dependence-switching copula model to examine dependence and tail dependence for four different market statuses, namely, rising-stocks/appreciating-currency, falling-stocks/depreciating-currency, rising-stocks/depreciating-currency, and falling-stocks/appreciating-currency. The model is then applied to daily stock returns and exchange rate changes for six major industrial countries over the 1990–2010 period. The dependence and tail dependence among the above four market statuses are asymmetric for most countries in the negative correlation regime, but symmetric in the positive correlation regime. These results enrich the findings in the existing literature and suggest that analyzing cross-market linkages within a time-invariant copula framework may not be appropriate.

Suggested Citation

  • Wang, Yi-Chiuan & Wu, Jyh-Lin & Lai, Yi-Hao, 2013. "A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1706-1719.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:5:p:1706-1719
    DOI: 10.1016/j.jbankfin.2013.01.001
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    More about this item

    Keywords

    Dependence-switching copula; Tail dependence; Systemic risk; Portfolio rebalancing; Return chasing;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General

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