Modeling exchange rate dependence dynamics at different time horizons

Alexandra Dias*, Paul Embrechts

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Despite an extensive body of research, the best way to model the dependence of exchange rates remains an open question. In this paper we present a new approach which employs a flexible time-varying copula model. It allows the conditional correlation between exchange rates to be both time-varying and modeled independently from the marginal distributions. We introduce a dynamic specification for the correlation using the Fisher transformation. Applied to Euro/US dollar and Japanese Yen/US dollar, our results reveal a significantly time-varying correlation, dependent on the past return realizations. We find that a time-varying copula with the proposed correlation specification gives better results than alternative dynamic benchmark models. The dynamic copula model outperforms at six different time horizons, ranging from hourly to daily, confirming the model specification.

Original languageEnglish
Pages (from-to)1687-1705
Number of pages19
JournalJournal of International Money and Finance
Issue number8
Publication statusPublished - Dec 2010


  • Conditional dependence
  • Copula-GARCH
  • Dynamic copula
  • Foreign exchange rates
  • Multivariate time series

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