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

See all articles by Alexandra Dias

Alexandra Dias

University of York

Paul Embrechts

Swiss Federal Institute of Technology Zurich; Swiss Finance Institute

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

Suggested Citation

Dias, Alexandra and Embrechts, Paul, Testing for Structural Changes in Exchange Rates Dependence Beyond Linear Correlation (September 8, 2008). The European Journal of Finance, Vol. 15, No. 7 & 8, pp. 619-37, 2009, Available at SSRN: https://ssrn.com/abstract=1674059

Alexandra Dias (Contact Author)

University of York ( email )

Freboys Lane
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

Paul Embrechts

Swiss Federal Institute of Technology Zurich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
453
PlumX Metrics