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Interdependence between exchange rates: Evidence from multivariate analysis since the financial crisis to the COVID-19 crisis

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  • Boubaker, Heni
  • Zorgati, Mouna Ben Saad
  • Bannour, Nawres
Abstract
In this paper, we seek to examine the relationship and dynamic dependence structure between the Australian dollar (AUD), euro (EUR), and the British pound (GBP), expressed in American dollars (USD) using a multivariate fractional cointegration model. Our empirical analysis reveals several important findings. First, the main advantage of this approach is to detect the long-term relationship as well as the short-term dynamics and to represent the interdependence between the variables. We further estimate a multivariate GARCH type model that enables us to examine the dynamic conditional correlations (short-run links) among the considered variables under the effects of long-run interactions and volatility persistence. We determine that the volatility transmission was time-varying and that influence from the crisis. Moreover, the joint distribution is explored using the Gumbel copulas in order to describe the nonlinear structure of dependence between the variables. The empirical results provide evidence of fractional cointegration between the exchanges rates and show long-run causal links between the variables and we find significant bidirectional causal links. In particular, we show a positive dynamic correlation and the dependence structure is represented by the optimal copula coefficient used for measuring the risk spillovers between the exchange rates.

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  • Boubaker, Heni & Zorgati, Mouna Ben Saad & Bannour, Nawres, 2021. "Interdependence between exchange rates: Evidence from multivariate analysis since the financial crisis to the COVID-19 crisis," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 592-608.
    • Handle: RePEc:eee:ecanpo:v:71:y:2021:i:c:p:592-608
    DOI: 10.1016/j.eap.2021.06.014
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    2. Klose, Jens, 2023. "European exchange rate adjustments in response to COVID-19, containment measures and stabilization policies," Economic Modelling, Elsevier, vol. 128(C).
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    6. Choi, Sun-Yong, 2022. "Volatility spillovers among Northeast Asia and the US: Evidence from the global financial crisis and the COVID-19 pandemic," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 179-193.

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    More about this item

    Keywords

    Exchange rate; Fractional cointegration; Multivariate GARCH; Gumbel copula; Risk spillover;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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