Azam, Kazim (2014) Dependence analysis between foreign exchange rates : a semi-parametric copula approach. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (TWERPS), Volume 2014 (Number 1052). (Unpublished)

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Abstract

Not only currencies are assets in investor's portfolio, central banks use them for implementing economic policies. This implies existence of some type of dependence pattern among the currencies. We investigate such patterns among daily Deutsche Mark (DM) (Euro later), UK Sterling (GBP) and the Japanese Yen (JPY) exchange rate, all considered against the US Dollar during various economic conditions. To overcome the short-comings of misspecification, normality and linear dependence for such time series, a exible semi-parametric copula methodology is adopted where the marginals are non-parametric but the copula is parametrically specified. Dependence is estimated both as a constant and time-varying measure. During the Pre-Euro period, we nd slightly more dependence when both DM (Euro)/USD and GBP/USD jointly appreciate as compared to joint depreciation, especially in the late 90s. Such results are reversed for GBP/USD and JPY/USD in the early 90s. Post-Euro, DM (Euro)/USD and GBP/USD exhibit stronger dependence when they jointly appreciate, which could indicate preference for price-stability in EU zone. Whereas the dependence of JPY/USD with both DM (Euro)/USD and GBP/USD is stronger when they jointly depreciate, this could imply preference for export competitiveness among the countries. In the beginning of Recent-Crisis period, DM (EURO)/USD and GBP/USD show more dependence when they jointly depreciate, but later we see the similar tendency for these currencies to be related more when they jointly appreciate. Such measures of asymmetric dependence among the currencies provide vital insight into Central banks preferences and investors portfolio balancing.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Copulas (Mathematical statistics), Time-series analysis, Foreign exchange -- Mathematical models
Series Name:	Warwick economics research papers series (TWERPS)
Publisher:	University of Warwick. Department of Economics
Place of Publication:	Coventry
Official Date:	October 2014
Dates:	Date Event October 2014 Available
Volume:	Volume 2014
Number:	Number 1052
Number of Pages:	28
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Open Access (Creative Commons)
Date of first compliant deposit:	28 July 2016
Date of first compliant Open Access:	28 July 2016

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