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Extreme Volatility Dependence in Exchange Rate

Author

Listed:
  • Magnolia Sosa Castro
  • Christian Bucio Pacheco
  • Héctor Eduardo Díaz Rodríguez

Abstract

This paper aims to analyse asymmetric volatility dependence in the exchange rate between the British Pound, Japanese Yen, Euro, and Mexican Peso compared to the U.S. dollar during different periods of turmoil and calm sub-periods between (1994-2018). GARCH and TARCH models are employed to model conditional variance. Once volatility is estimated, the Copula approach provides an upper and lower tail dependence measure for each subperiod: 1994-1999, 2000-2007, 2007-2012, 2013-2018. The empirical joint distribution of exchange rate volatility pairs displays high tail-dependence in the lower tail and low tail-dependence in the upper tail. Results have important implications in term of risk management and investment strategies. ****** Este artículo analiza la dependencia asimétrica de la volatilidad de los tipos de cambio entre la libra esterlina, yen japonés, euro y peso mexicano en términos del dólar americano, en un periodo que comprende episodios de calma e incertidumbre (1994-2018). Los modelos GARCH y TARCH se emplean para modelar la volatilidad del tipo de cambio. Una vez que la volatilidad se estima, se calcula la dependencia de la cola superior e inferior, para cada subperiodo: 1994-1999, 2000-2007, 2007-2012, 2013-2018. La dependencia bivariada de la volatilidad cambiaria muestra alta dependencia en la cola inferior y baja dependencia en la cola superior. ****** Este artigo analisa a dependencia assimétrica da volatilidade das taxas de cambio entre a libra esterlina, o iene japones, o euro e o peso mexicano em relacao ao dólar norte-americano, em um período que inclui episódios de calma e incerteza (1994-2018). Os modelos GARCH e TARCH sao usados para modelar a volatilidade da taxa de cambio. Uma vez que a volatilidade é estimada, calcula-se a dependencia da cauda superior e inferior, para cada subperíodo: 1994-1999, 2000-2007, 2007-2012, 2013-2018. A dependencia bivariada da volatilidade da taxa de cambio mostra alta dependencia na cauda inferior e baixa dependencia na cauda superior.

Suggested Citation

  • Magnolia Sosa Castro & Christian Bucio Pacheco & Héctor Eduardo Díaz Rodríguez, 2021. "Extreme Volatility Dependence in Exchange Rate," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 40(82), pages 25-55, February.
    • Handle: RePEc:col:000093:020159
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; volatility modelling; tail dependence.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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