Dias, Alexandra and Embrechts, Paul. (2010) Modeling exchange rate dependence dynamics at different time horizons. Journal of International Money and Finance, Vol.29 (No.8). pp. 1687-1705. ISSN 02615606

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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. (C) 2010 Elsevier Ltd. All rights reserved.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of International Money and Finance
Publisher:	Elsevier BV
ISSN:	02615606
Date:	December 2010
Volume:	Vol.29
Number:	No.8
Number of Pages:	19
Page Range:	pp. 1687-1705
Identification Number:	10.1016/j.jimonfin.2010.06.004
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/4645

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