A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach

Yi-Chiuan Wang, Jyh-Lin Wu and Yi-Hao Lai

Journal of Banking & Finance, 2013, vol. 37, issue 5, 1706-1719

Abstract: This paper develops a dependence-switching copula model to examine dependence and tail dependence for four different market statuses, namely, rising-stocks/appreciating-currency, falling-stocks/depreciating-currency, rising-stocks/depreciating-currency, and falling-stocks/appreciating-currency. The model is then applied to daily stock returns and exchange rate changes for six major industrial countries over the 1990–2010 period. The dependence and tail dependence among the above four market statuses are asymmetric for most countries in the negative correlation regime, but symmetric in the positive correlation regime. These results enrich the findings in the existing literature and suggest that analyzing cross-market linkages within a time-invariant copula framework may not be appropriate.

Keywords: Dependence-switching copula; Tail dependence; Systemic risk; Portfolio rebalancing; Return chasing (search for similar items in EconPapers)
JEL-codes: C32 C51 F30 G15 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:5:p:1706-1719

DOI: 10.1016/j.jbankfin.2013.01.001

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