Testing for Structural Changes in Exchange Rates Dependence Beyond Linear Correlation
The European Journal of Finance, Vol. 15, No. 7 & 8, pp. 619-37, 2009
Posted: 10 Sep 2010
Date Written: September 8, 2008
Abstract
In this paper we test for structural changes in the conditional dependence of two-dimensional foreign exchange data. We show that by modeling the conditional dependence structure using copulae we can detect changes in the dependence beyond linear correlation like changes in the tail of the joint distribution. This methodology is relevant for estimating risk management measures as portfolio Value-at-Risk, pricing multi-name financial instruments and portfolio asset allocation. Our results include evidence of the existence of changes in the correlation as well as in the fatness of the tail of the dependence between Deutsche Mark and Japanese Yen.
Keywords: Change-point tests, conditional dependence, copula, GARCH, risk management
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