Interdependence between exchange rates: Evidence from multivariate analysis since the financial crisis to the COVID-19 crisis

Heni Boubaker, Mouna Ben Saad Zorgati and Nawres Bannour

Economic Analysis and Policy, 2021, vol. 71, issue C, 592-608

Abstract: In this paper, we seek to examine the relationship and dynamic dependence structure between the Australian dollar (AUD), euro (EUR), and the British pound (GBP), expressed in American dollars (USD) using a multivariate fractional cointegration model. Our empirical analysis reveals several important findings. First, the main advantage of this approach is to detect the long-term relationship as well as the short-term dynamics and to represent the interdependence between the variables. We further estimate a multivariate GARCH type model that enables us to examine the dynamic conditional correlations (short-run links) among the considered variables under the effects of long-run interactions and volatility persistence. We determine that the volatility transmission was time-varying and that influence from the crisis. Moreover, the joint distribution is explored using the Gumbel copulas in order to describe the nonlinear structure of dependence between the variables. The empirical results provide evidence of fractional cointegration between the exchanges rates and show long-run causal links between the variables and we find significant bidirectional causal links. In particular, we show a positive dynamic correlation and the dependence structure is represented by the optimal copula coefficient used for measuring the risk spillovers between the exchange rates.

Keywords: Exchange rate; Fractional cointegration; Multivariate GARCH; Gumbel copula; Risk spillover (search for similar items in EconPapers)
JEL-codes: C13 F31 G14 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:71:y:2021:i:c:p:592-608

DOI: 10.1016/j.eap.2021.06.014

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