Detecting exchange rate contagion in Asian exchange rate markets using asymmetric DDC-GARCH and R-vine copulas

Gomez-Gonzalez, Jose and Rojas-Espinosa, Wilmer (2018): Detecting exchange rate contagion in Asian exchange rate markets using asymmetric DDC-GARCH and R-vine copulas.

Abstract

This study uses asymmetric DCC-GARCH models and copula functions for studying exchange rate contagion in a group of twelve Asia-Pacific countries. Using daily data between November 1991 and March 2017, shows that extreme market movements are mainly associated with the high degree of interdependence registered by countries in this region. The evidence of contagion is scarce. Asymmetries do not appear to be important. Specifically, currency co-movements are statistically identical during times of extreme market appreciation and depreciation, indicating that phenomena such as the "fear of appreciation" do not appear to be relevant in the region's foreign exchange markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate contagion; Asian financial crisis; Copula functions; DCC-GARCH models.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

Arouri, M. E. H., Bellalah, M., Hamida, N. B., & Nguyen, D. K. (2012). Relevance of fair value accounting for financial instruments: some french evidence. International journal of business, 17(2), 209.

Basu, M. R. (2002). Financial contagion and investor" learning": An empirical investigation (No. 2-218). International Monetary Fund.

Bedford, T., & Cooke, R. M. (2001). Probability density decomposition for conditionally dependent random variables modeled by vines. Annals of Mathematics and Artificial intelligence, 32(1), 245–268.

Bedford, T., & Cooke, R. M. (2002). Vines: A new graphical model for dependent random variables. Annals of Statistics, 1031–1068.

Beirne, J., & Gieck, J. (2014). Interdependence and contagion in global asset markets. Review of International Economics, 22(4), 639–659.

Bollerslev, T. (1990). Modelling the coherence in short-run nominal exchange rates: a multivariate generalized arch model. The review of economics and statistics, 498–505.

Bordo, M. D., & Murshid, A. P. (2000). Are financial crises becoming increasingly more contagious? what is the historical evidence on contagion? (Tech. Rep.). National Bureau of Economic Research.

Cappiello, L., Engle, R. F., & Sheppard, K. (2006). Asymmetric dynamics in the correlations of global equity and bond returns. Journal of Financial econometrics, 4(4), 537–572.

Cherubini, U., Luciano, E., & Vecchiato, W. (2004). Copula methods in finance. John Wiley & Sons.

Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic correlation analysis of financial contagion: Evidence from asian markets. Journal of International Money and finance, 26(7), 1206–1228.

Claessens, S., & Forbes, K. (2001). International financial contagion: An overview of the issues and the book. In International financial contagion (pp. 3–17). Springer.

Czado, C., Schepsmeier, U., & Min, A. (2012). Maximum likelihood estimation of mixed c-vines with application to exchange rates. Statistical Modelling, 12(3), 229–255.

De Gregorio, J., & Valdes, R. O. (2001). Crisis transmission: Evidence from the debt, tequila, and asian flu crises. In International financial contagion (pp. 99–127). Springer.

Dissmann, J., Brechmann, E. C., Czado, C., & Kurowicka, D. (2013). Selecting and estimating regular vine copulae and application to financial returns. Computational Statistics & Data Analysis, 59, 52–69.

Dungey, M., Fry, R., González-Hermosillo, B.,&Martin, V. (2006). Contagion in international bond markets during the russian and the ltcm crises. Journal of Financial Stability, 2(1), 1–27.

Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339–350.

Engle, R. F., Gallo, G. M., & Velucchi, M. (2012). Volatility spillovers in east asian financial markets: a mem-based approach. Review of Economics and Statistics, 94(1), 222–223.

Forbes, K., & Rigobon, R. (2001). Measuring contagion: conceptual and empirical issues. In International financial contagion (pp. 43–66). Springer.

Glick, R., & Rose, A. K. (1999). Contagion and trade: Why are currency crises regional? Journal of international Money and Finance, 18(4), 603–617.

Gómez-González, J. E., Loaiza-Maya, R. A., & Melo-Velandia, L. F. (2015a). Exchange rate contagion in latin america. Research in International Business and Finance, 34, 355–367.

Gómez-González, J. E., Loaiza-Maya, R. A., & Melo-Velandia, L. F. (2015b). Latin american exchange rate dependencies: A regular vine copula approach. Contemporary Economic Policy, 33(3), 535–549.

Hansen, B. E. (1994). Autoregressive conditional density estimation. International Economic Review, 705–730.

Joe, H. (1996). Families of m-variate distributions with given margins and m (m-1)/2 bivariate dependence parameters. Lecture Notes-Monograph Series, 120–141.

Joe, H. (1997). Multivariate models and multivariate dependence concepts. CRC Press.

Kawai, M. (2005). East asian economic regionalism: progress and challenges. Journal of Asian Economics, 16(1), 29–55.

Kurowicka, D., & Cooke, R. M. (2006). Uncertainty analysis with high dimensional dependence modelling. John Wiley & Sons.

Lee, S. B., & Kim, K. J. (1993). Does the october 1987 crash strengthen the co-movements among national stock markets? Review of Financial Economics, 3(1), 89.

Levy-Yeyati, E., Sturzenegger, F., & Gluzmann, P. A. (2013). Fear of appreciation. Journal of Development Economics, 101, 233–247.

Lucey, B. M., & Voronkova, S. (2008). Russian equity market linkages before and after the 1998 crisis: Evidence from stochastic and regime-switching cointegration tests. Journal of International Money and Finance, 27(8), 1303–1324.

Nelsen, R. B. (2007). An introduction to copulas. Springer Science & Business Media. Sklar, M. (1959). Fonctions de répartition à n dimensions et leurs marges. Université Paris 8.

Tse, Y. K., & Tsui, A. K. (2000). A multivariate garch model with time-varying correlations.