Modeling exchange rate dependence dynamics at different time horizons

By Alexandra Dias, Paul Embrechts. 2010

108 citations recorded by the source corpus.

Despite an extensive body of research, the best way to model the dependence of exchange rates remains an open question. In this paper we present a new approach which employs a flexible time-varying copula model. It allows the conditional correlation between exchange rates to be both time-varying and modeled independently from the marginal distributions. We introduce a dynamic specification for the correlation using the Fisher transformation. Applied to Euro/US dollar and Japanese Yen/US dollar, our results reveal a significantly time-varying correlation, dependent on the past return realizations. We find that a time-varying copula with the proposed correlation specification gives better results than alternative dynamic benchmark models. The dynamic copula model outperforms at six different time horizons, ranging from hourly to daily, confirming the model specification.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6b62ef4f41976aaece0d1d8a8070ba43177c6999

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

A review of copula models for economic time series (2012, background): “[21] and Dias and Embrechts [44] study the copulas of financial assets using intra-daily data sampled at different frequencies; Grangeret al.”
Copula Methods for Forecasting Multivariate Time Series (2013, background): “Locally constant copula models are considered by Giacomini, Härdle and Spokoiny (2009), Guégan and Zhang (2009), Dias and Embrechts (2010), Harvey (2010), Rémillard (2010) and Busetti and Harvey (2011).”
Long Memory Dynamics for Multivariate Dependence under Heavy Tails (2014, unknown): “Dias and Embrechts (2010) refer to (3.1) as the Fisher(1, 1) dynamic model and they report that it outperforms a set of competing models.”
Exchange return co-movements and volatility spillovers before and after the introduction of euro (2012, result): “…significant indicating that the second moments of exchange returns are indeed time-varying; a feature documented in many studies (see, for instance, Dias and Embrechts, 2010).9 The most interesting feature of Table 2 is that, on average, the magnitude of co-movements is lower in the post-euro…”