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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.

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  • 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, Canadian Economics Association, vol. 43(3), pages 1016-1039, August.
    • Handle: RePEc:cje:issued: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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