IDEAS home Printed from https://ideas.repec.org/p/ags/uwarer/270231.html
   My bibliography  Save this paper

Dependence Analysis between Foreign Exchange Rates: A Semi-Parametric Copula Approach

Author

Listed:
  • Azam, Kazim

Abstract

Not only currencies are assets in investor’s portfolio, central banks use them for implementing economic policies. This implies existence of some type of dependence pattern among the currencies. We investigate such patterns among daily Deutsche Mark (DM) (Euro later), UK Sterling (GBP) and the Japanese Yen (JPY) exchange rate, all considered against the US Dollar during various economic conditions. To overcome the short-comings of misspecification, normality and linear dependence for such time series, a flexible semi-parametric copula methodology is adopted where the marginals are non-parametric but the copula is parametrically specified. Dependence is estimated both as a constant and time-varying measure. During the Pre-Euro period, we find slightly more dependence when both DM (Euro)/USD and GBP/USD jointly appreciate as compared to joint depreciation, especially in the late 90s. Such results are reversed for GBP/USD and JPY/USD in the early 90s. Post-Euro, DM (Euro)/USD and GBP/USD exhibit stronger dependence when they jointly appreciate, which could indicate preference for price-stability in EU zone. Whereas the dependence of JPY/USD with both DM (Euro)/USD and GBP/USD is stronger when they jointly depreciate, this could imply preference for export competitiveness among the countries. In the beginning of Recent-Crisis period, DM (EURO)/USD and GBP/USD show more dependence when they jointly depreciate, but later we see the similar tendency for these currencies to be related more when they jointly appreciate. Such measures of asymmetric dependence among the currencies provide vital insight into Central banks preferences and investors portfolio balancing.

Suggested Citation

  • Azam, Kazim, 2014. "Dependence Analysis between Foreign Exchange Rates: A Semi-Parametric Copula Approach," Economic Research Papers 270231, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:270231
    DOI: 10.22004/ag.econ.270231
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/270231/files/twerp_1052_azam.pdf
    Download Restriction: no
    File URL: https://ageconsearch.umn.edu/record/270231/files/twerp_1052_azam.pdf?subformat=pdfa
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.270231?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    2. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    3. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    4. Shinji Takagi, 1999. "The Yen and Its East Asian Neighbors 1980-1995: Cooperation or Competition?," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues, pages 185-210, National Bureau of Economic Research, Inc.
    5. Umberto Cherubini & Elisa Luciano, 2001. "Value-at-risk Trade-off and Capital Allocation with Copulas," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(2), pages 235-256, July.
    6. Ito, Takatoshi & Krueger, Anne O. (ed.), 1999. "Changes in Exchange Rates in Rapidly Developing Countries," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226386737, April.
    7. Robert F. Engle & Simone Manganelli, 2004. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 367-381, October.
    8. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-883, November.
    9. Dias, Alexandra & Embrechts, Paul, 2010. "Modeling exchange rate dependence dynamics at different time horizons," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1687-1705, December.
    10. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(4), pages 465-487, December.
    11. Kim, Gunky & Silvapulle, Mervyn J. & Silvapulle, Paramsothy, 2007. "Comparison of semiparametric and parametric methods for estimating copulas," Computational Statistics & Data Analysis, Elsevier, vol. 51(6), pages 2836-2850, March.
    12. Gianna Boero & Param Silvapulle & Ainura Tursunalieva, 2011. "Modelling the bivariate dependence structure of exchange rates before and after the introduction of the euro: a semi‐parametric approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(4), pages 357-374, October.
    13. Andrew J. Patton, 2006. "Modelling Asymmetric Exchange Rate Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 527-556, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Azam, Kazim, 2014. "Dependence Analysis between Foreign Exchange Rates: A Semi-Parametric Copula Approach," The Warwick Economics Research Paper Series (TWERPS) 1052, University of Warwick, Department of Economics.
    2. Tim Bollerslev, 2008. "Glossary to ARCH (GARCH)," CREATES Research Papers 2008-49, Department of Economics and Business Economics, Aarhus University.
    3. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," SIRE Discussion Papers 2015-78, Scottish Institute for Research in Economics (SIRE).
    4. Avdulaj, Krenar & Barunik, Jozef, 2015. "Are benefits from oil–stocks diversification gone? New evidence from a dynamic copula and high frequency data," Energy Economics, Elsevier, vol. 51(C), pages 31-44.
    5. Chen, Bin & Hong, Yongmiao, 2014. "A unified approach to validating univariate and multivariate conditional distribution models in time series," Journal of Econometrics, Elsevier, vol. 178(P1), pages 22-44.
    6. Patton, Andrew, 2013. "Copula Methods for Forecasting Multivariate Time Series," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 899-960, Elsevier.
    7. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-78, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Mario Cerrato & John Crosby & Minjoo Kim & Yang Zhao, 2015. "Modeling Dependence Structure and Forecasting Market Risk with Dynamic Asymmetric Copula," Working Papers 2015_15, Business School - Economics, University of Glasgow.
    9. Rob van den Goorbergh, 2004. "A Copula-Based Autoregressive Conditional Dependence Model of International Stock Markets," DNB Working Papers 022, Netherlands Central Bank, Research Department.
    10. Zhou, Xinmiao & Qian, Huanhuan & Pérez-Rodríguez, Jorge. V. & González López-Valcárcel, Beatriz, 2020. "Risk dependence and cointegration between pharmaceutical stock markets: The case of China and the USA," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    11. Li, Xiao-Ming & Rose, Lawrence C., 2009. "The tail risk of emerging stock markets," Emerging Markets Review, Elsevier, vol. 10(4), pages 242-256, December.
    12. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "The impact of Euro through time: Exchange rate dynamics under different regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1375-1408, January.
    13. Jondeau, Eric & Rockinger, Michael, 2006. "The Copula-GARCH model of conditional dependencies: An international stock market application," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 827-853, August.
    14. Cerrato, Mario & Crosby, John & Kim, Minjoo & Zhao, Yang, 2014. "Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas," SIRE Discussion Papers 2015-25, Scottish Institute for Research in Economics (SIRE).
    15. Tong, Bin & Diao, Xundi & Wu, Chongfeng, 2015. "Modeling asymmetric and dynamic dependence of overnight and daytime returns: An empirical evidence from China Banking Sector," Economic Modelling, Elsevier, vol. 51(C), pages 366-382.
    16. repec:lan:wpaper:2452 is not listed on IDEAS
    17. Marc Joëts, 2012. "Energy price transmissions during extreme movements," Working Papers hal-04141047, HAL.
    18. Joëts, Marc, 2014. "Energy price transmissions during extreme movements," Economic Modelling, Elsevier, vol. 40(C), pages 392-399.
    19. S Zhang & I Paya & D Peel, 2009. "Linkages between Shanghai and Hong Kong stock indices," Working Papers 599248, Lancaster University Management School, Economics Department.
    20. Gong, Yuting & Ma, Chao & Chen, Qiang, 2022. "Exchange rate dependence and economic fundamentals: A Copula-MIDAS approach," Journal of International Money and Finance, Elsevier, vol. 123(C).
    21. Patton, Andrew J., 2012. "A review of copula models for economic time series," Journal of Multivariate Analysis, Elsevier, vol. 110(C), pages 4-18.

    More about this item

    Keywords

    Financial Economics;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:uwarer:270231. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.