Modeling exchange rate dependence dynamics at different time horizons

Abstract

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.JEL Classification: C32, C50, F31

A Longer Look at the Asymmetric Dependence between Hedge Funds and the Equity Market

“…These results relate to and are consistent with those of Breymann, Dias, and Embrechts (2003) and Dias and Embrechts (2007) in that the dependence structure changes as a function of the time horizon. These authors investigate highfrequency exchange rates at 6 different time horizons and find that the dependence structure is best described by a t-copula with successively larger degrees of freedom as the time horizon increases.…”

Exchange return co-movements and volatility spillovers before and after the introduction of euro

“…In both periods, the DCC model seems to be very well specified, as the estimates of the DCC parameters, α and β, are always statistically 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). 10 The most interesting feature of Table 2 is that, on average, the magnitude of co-movements is lower in the post-euro period compared to the pre-euro period.…”

Long memory dynamics for multivariate dependence under heavy tails

“…(d) Fisher : benchmark model of Dias and Embrechts (2010); (e) FIBase : benchmark model of Patton (2002Patton ( , 2006). …”