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The dependence structure between equity and foreign exchange markets and tail risk forecasts of foreign investments

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  • Minjoo Kim
  • Junhong Yang
  • Pengcheng Song
  • Yang Zhao

Abstract

Motivated by the importance of the dependence structure between equity and foreign exchange rates in international financial markets, we investigate whether modelling the dependence structure can help forecast the tail risk of foreign investments. We propose a new time-varying asymmetric copula for modelling the dependence structure and forecasting the tail risk. We conduct backtesting on our tail risk forecasts for 12 major developed and emerging markets. We find that modelling the dependence structure can improve the tail risk forecast and make risk management of foreign investments more robust.

Suggested Citation

  • Minjoo Kim & Junhong Yang & Pengcheng Song & Yang Zhao, 2021. "The dependence structure between equity and foreign exchange markets and tail risk forecasts of foreign investments," Quantitative Finance, Taylor & Francis Journals, vol. 21(5), pages 815-835, May.
    • Handle: RePEc:taf:quantf:v:21:y:2021:i:5:p:815-835
    DOI: 10.1080/14697688.2020.1812701
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    Cited by:

    1. Hertrich, Daniel, 2023. "Carry and conditional value at risk trend: Capturing the short-, intermediate-, and long-term trends of left-tail risk forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).

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