The dependence structure between equity and foreign exchange markets and tail risk forecasts of foreign investments

Minjoo Kim, Junhong Yang, Pengcheng Song and Yang Zhao

Quantitative Finance, 2021, vol. 21, issue 5, 815-835

Abstract: Motivated by the importance of the dependence structure between equity and foreign exchange rates in international financial markets, we investigate whether modelling the dependence structure can help forecast the tail risk of foreign investments. We propose a new time-varying asymmetric copula for modelling the dependence structure and forecasting the tail risk. We conduct backtesting on our tail risk forecasts for 12 major developed and emerging markets. We find that modelling the dependence structure can improve the tail risk forecast and make risk management of foreign investments more robust.

Date: 2021
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DOI: 10.1080/14697688.2020.1812701

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