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Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index

Christoph Schleicher, Matthew Hurd and Mark Salmon ()

No 215, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We model the joint distribution between the euro-sterling and the dollar-sterling exchange rate using option-implied markginal distributions that are connected via a copula function. We then derive univariate distributions for the simpliefied sterling effective exchange rate index (ERI). Our results indicate that simple parametric copula functions, such as the commonly used Normal and Frank copulas, fail to capture the degree of asymmetry observed in the data. We overcome this problem by using a non-parametric dependence function in the form of a Bernstein copula

Keywords: copula functions; option implied densities; effective exchange rates (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2005-11-11
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Working Paper: Using copulas to construct bivariate foreign exchange distributions with an application to the sterling exchange rate index (2007) Downloads
Working Paper: Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index (2005) Downloads
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