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Extreme co-movements and dependencies among major international exchange rates: A copula approach

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  • Albulescu, Claudiu Tiberiu
  • Aubin, Christian
  • Goyeau, Daniel
  • Tiwari, Aviral Kumar

Abstract

This paper investigates the bivariate dependence structure between four international exchange rates (EUR, GBP, CAD, JPY), against the US Dollar, using daily data for the time-span 1999–2014. We use different time-invariant and time-varying copula functions with different forms of tail dependence, and discover a positive dependence between all exchange rates, although the dependence is less strong for the JPY-pairs of exchange rates. Furthermore, we find evidence of symmetric tail dependence. Finally, the dependence is time-varying and intensifies after the onset of the recent global financial crisis, with the exception of the JPY-pairs. These findings provide additional insight for policy makers and for understanding spillover effects on FX market, given the fact that the tail dependence is either positive or negative, is time-varying, and has different structures.

Suggested Citation

  • Albulescu, Claudiu Tiberiu & Aubin, Christian & Goyeau, Daniel & Tiwari, Aviral Kumar, 2018. "Extreme co-movements and dependencies among major international exchange rates: A copula approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 56-69.
    • Handle: RePEc:eee:quaeco:v:69:y:2018:i:c:p:56-69
    DOI: 10.1016/j.qref.2018.03.007
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    Keywords

    Exchange rates; Portfolio optimization; Dependence structure; Copulas; Tail dependence;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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