How Do Linkages Between Major Exchange Rates Differ When the Daily Quotations Come From Different Times of Day? Analysis Using Bid and Ask Prices and DCC-Copula Models

Abstract

In the paper, we document how the dynamics of linkages between selected major exchange rates changes during a day, depending on the activity of different groups of traders, and show the impact of important events and news on the dependence structures. The exchange rates under scrutiny are EUR/USD, AUD/USD, GBP/USD, and NZD/USD. We consider dai-ly returns calculated using the exchange rates quoted at different times of day. The analysis is performed separately for bid and ask prices. The dynamics of the dependence is modeled by means of DCC-copula models, and the strength of the linkages is described using dynam-ic Spearman’s rho coefficients. Moreover, we obtain the results concerning quantile depend-ence probabilities. The approach used enables us to scrutinize changes in the dynamics of the conditional dependence structure, depending on the time of day, which can be useful in risk management.

Keywords: exchange rates, major currencies, bid, ask, linkages, copula, DCC-copula, Spearman rho, quantile dependence

JEL Classification: G15, F31, C58, C32