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The dependence structure between the Canadian stock market and the USD/CAD exchange rate: a copula approach

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  • Leo Michelis
  • Cathy Ning

Abstract

This paper investigates the dependence structure between the real Canadian stock returns and the real USD/CAD exchange rate returns, using the Symmetrized Joe‐Clayton (SJC) copula function. We estimate the SJC copula with monthly data over the period 1995:1 to 2006:12. Our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns, such that the two returns are more dependent in the left than in the right tail of their joint distribution. We explain this asymmetric dependence in terms of an asymmetric interest rate policy by Canadian monetary authorities in response to changes in the real exchange rate during sub‐periods of falling and rising commodity prices. Le texte analyse la structure de dépendance entre les rendements réels sur les actions canadiennes en bourse et les taux de rendements réels sur le taux de change entre le Canada et les États‐Unis en utilisant la fonction à copule Symétrisée Joe‐Clayton (SJC). On calibre cette fonction à l’aide de données mensuelles pour la période allant de 1995 :1 à 2006 :12. Les résultats montrent une dépendance asymétrique statique et dynamique significative entre les rendements réels sur les actions et les taux de rendements réels sur le taux de change, telle que les deux rendements réels sont davantage dépendants l’un de l’autre à l’extrémité gauche qu’à l’extrémité droite de leur distribution conjointe. On explique cette dépendance asymétrique en termes d’une politique asymétrique du taux d’intérêt par les autorités canadiennes en réponse aux changements dans le taux de change réel durant les sous‐périodes de prix croissants et décroissants des denrées.

Suggested Citation

  • Leo Michelis & Cathy Ning, 2010. "The dependence structure between the Canadian stock market and the USD/CAD exchange rate: a copula approach," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(3), pages 1016-1039, August.
    • Handle: RePEc:wly:canjec:v:43:y:2010:i:3:p:1016-1039
    DOI: 10.1111/j.1540-5982.2010.01604.x
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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

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