The Dynamics of Linkages Between Major Currencies: How Does It Change Depending on the Time of Day?

33 Pages Posted: 12 Aug 2020

See all articles by Małgorzata Doman

Małgorzata Doman

Poznań University of Economics and Business

Ryszard Doman

Adam Mickiewicz University, Poznań

Date Written: July 15, 2020

Abstract

In this paper we document how the dynamics of linkages between 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 subject of analysis are linkages between the exchange rates EUR/USD, AUD/USD, GBP/USD and NZD/USD. For each hour of the day, we model the conditional dependence between the daily returns calculated at that time. The analysis is performed separately for bid and ask prices, which enables us to obtain some results concerning the sellers and buyers behavior. The dynamics of the conditional dependence is modeled by means of bivariate Markov-switching copula models, and the strength of the linkages is described by means of dynamic Spearman’s rho coefficients. The rankings of the strength of the linkages, depending on the hour, which we obtain using the model confidence set methodology, can be useful in trade decision-making in the FOREX market.

Keywords: exchange rates, major currencies, FOREX, bid, ask, linkages, copula, Spearman’s rho, Markov-switching, model confidence set

JEL Classification: G15, F31, C58, C32

Suggested Citation

Doman, Małgorzata and Doman, Ryszard, The Dynamics of Linkages Between Major Currencies: How Does It Change Depending on the Time of Day? (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3652087 or http://dx.doi.org/10.2139/ssrn.3652087

Małgorzata Doman

Poznań University of Economics and Business ( email )

Al. Niepodległości 10
Poznań, 61-875
Poland

Ryszard Doman (Contact Author)

Adam Mickiewicz University, Poznań ( email )

Uniwersytetu Poznańskiego 4
Poznań, 61-614
Poland

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