Abstract
This paper applies multivariate factor copula modeling methods to study the dependence relationships of exchange rates. We found that conditional on the common factors, the dependence among the chosen currencies is weakly asymmetric, and the two-factor Gaussian copula modeling hypothesis is more appropriate.
Highlights
The global financial crisis that began in 2007 has led to extreme volatility in the foreign exchange market
We introduce an alternative way of approaching the problem of finding the dependence relationships between fluctuations on exchange rates by using copula models conditional on the common factors found through the factor analysis
Since the transformation is a percentile-to-percentile transformation, the correlations among the exchange rate returns can be measured as the correlations among these transformed normal variables, and these calculated correlations are referred to as the copula correlations (Hull, 2008)
Summary
The global financial crisis that began in 2007 has led to extreme volatility in the foreign exchange market. The Canadian government needs to predict the position of the Canadian dollar in global markets quickly in order to stabilize the economy and minimize the risk of holding different types of currencies. Corporations need to know the same information in order to minimize the risk of holding certain currencies when they are conducting international business. Individual investors increasingly need to know the same information to plan household budgets and change consumption habits to accommodate the rising and falling currency. It is necessary, and important, to investigate the relationships among the Canadian dollar and other currencies, especially during volatile periods. This research will examine these relationships during economic booms and recessions
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