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Modeling exchange rate dependence dynamics at different time horizons

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journal contribution
posted on 2012-10-24, 08:54 authored by Alexandra Dias, P. Embrechts
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.

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Citation

Journal Of International Money And Finance, 2010, 29 (8), pp. 1687-1705

Version

  • AM (Accepted Manuscript)

Published in

Journal Of International Money And Finance

Publisher

Elsevier

issn

0261-5606

Copyright date

2010

Available date

2012-10-24

Publisher version

http://www.sciencedirect.com/science/article/pii/S0261560610000835

Language

en

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