Abstract
This paper examines the joint movement and tail dependence structure between the pair of foreign exchange rates (EUR, USD and GBP) against the GHS, using daily exchange rates data expressed in GHS per unit of foreign currencies (EUR, USD and GBP) between the time range of 24 February 2009 and 19 December 2019. We use different sets of both static (time-invariant) and time-varying copulas with different levels of dependence and tail dependence measures, and the study results reveal positive dependence between all exchange rates pairs, though the dependencies for EUR-USD and GBP-USD pairs are not as strong as the EUR-GBP pair. The findings also reveal symmetric tail dependence, and dependence evolves over time. Notwithstanding this, the asymmetric tail dependence copulas provide evidence of upper tail dependence. We compare the copula results to DCC(1,1)-GARCH(1,1) model result and find the copula to be more sensitive to extreme co-movement between the currency pairs. The afore-mentioned findings, therefore, offer forex market players the opportunity to relax in hoarding a particular foreign currency in anticipation of domestic currency depreciation.
Highlights
Major financial institutions and investors are concerned about extreme complexity and high volatility of financial markets, most especially the global currency markets which are known to dominate other markets such as stock and bond markets
We began our analysis by first estimating the marginal models indicated by Equation (1) through to (3) before estimating the dependence model parameters
Akaike Information Criteria (AIC) value is selected as the best fit model
Summary
Major financial institutions and investors are concerned about extreme complexity and high volatility of financial markets, most especially the global currency markets which are known to dominate other markets such as stock and bond markets. This is attributed to the internationalization of modern business, the continuing growth in world trade relative to national economies, the trend towards economic integration and the rapid pace of change in money transfer technology, which all account for the increased importance of exchange rates (Copeland 2008). From the perspective of monetary policy authorities and economic policymakers, understanding the dynamics of exchange rates provide an avenue for economic policy assessment and international economic policy coordination
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