Extremal Dependence In Exchange Rate Markets
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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