Modelling the bivariate dependence structure of exchange rates before and after the introduction of the euro: a semi-parametric approach

Abstract

This paper investigates the bivariate dependence structure for three pairs of exchange rates measured against the US dollar: Euro and Japanese yen, Euro and British pound, Euro and Swiss franc, over the period January 1994 to November 2007. The Deutsche mark (DM) is used for the pre-euro period. By using non-parametric plots and copula models estimated by semi-parametric methods, we are able to detect changes in the dependence structure from the pre-euro to the post-euro period for the pairs DM (Euro)-Japanese yen, and DM (Euro)-British pound, with major changes occurring during the initial years of the launch of the new currency. For these two pairs of exchange rates we also capture asymmetric tail dependence, implying different degrees of comovements during appreciations and depreciations against the dollar. The dependence between the DM (Euro) and the Swiss franc remains unchanged, both in strength and structure, over the whole sample period, reflecting a marked tendency of the Swiss franc to follow the fluctuations of the DM and Euro against the dollar. The results may be of interest for international trade, international portfolio diversification and currency risk management.

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

“…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. These results are in contrast to those in Boero et al (2011). For instance, in Boero et al (2011), co-movements between the EUR and the GBP returns increase after the introduction of the euro compared to period before the euro while, I find the opposite.…”

“…These results are in contrast to those in Boero et al (2011). For instance, in Boero et al (2011), co-movements between the EUR and the GBP returns increase after the introduction of the euro compared to period before the euro while, I find the opposite. However, the explanation behind this contradiction is the difference in the pre-and the post-euro period sample size used.…”

“…4 A similar exchange rate replacement and date separation is used in Boero et al (2011). Moreover, having artificial data for the euro (obtained from the Bank of England online database) over the first sub-period, it is found that the unconditional correlation between the euro and the Deutsche mark is 0.987 supporting the idea of replacing the euro with the Deutsche mark in the former period.…”

“…For instance, Boero et al (2011) find varying degrees of pairwise co-movements of the euro, the pound and the yen during appreciations and depreciations against the US dollar for the period 1994-2007. Wang and Yang (2009, using data between 1996 and 2004, find evidence of asymmetric volatility in the Australian dollar, British pound and the Japanese yen against the US dollar exchange rates.…”

“…Despite the fact that considerable amount of studies examined return co-movements and volatility spillovers either before or after the introduction of the euro, few studies formally compare both periods jointly. One of these exceptions is the study of Boero et al (2011) who investigate the bivariate dependence structure of the Deutsche mark (euro after 1999), the British pound, the Swiss franc and the Japanese yen vis-à-vis the US dollar before and after the introduction of the euro. Based on copula and non-parametric plots the authors find that, in addition to the results reported above, co-movements of the pound and the euro increase in the post-euro period compared to the pre-euro and its transition period, while co-movements of the euro and the franc remain relatively stable over time.…”