Modeling dependencies between exchange rates using timeinvariant and time-varying copulas

Abstract

In this project, the bivariate dependence structures between the Japanese Yen, Chinese Yuan, and Hong Kong Dollar exchange rates against the US Dollar are studied by using time-invariant and time-varying copulas. The period from 20.03.2010- 20.03.2020 is used for numerical simulations and marginal distributions are determined by the ARMA-tGARCH approach. The optimal models are chosen based on AIC values. Then the copulas are determined by the optimal choice of marginal distributions and finally, copulas are numerically constructed and used to describe dependencies between these three exchange-rates. Changes in the linear correlation coefficient over time are studied using time-varying copulas. The R script is provided to implement this procedure. The results suggest a positive dependence and greater lower-tail dependence between pairs of Japanese Yen-Chinese Yuan and Chinese Yuan-Hong Kong Dollar exchange rates.