The dynamics of linkages between European currencies: How does it change according to the time of day?
The dynamics of linkages between European currencies: How does it change according to the time of day?

Author(s): Małgorzata Domańska, Ryszard Doman
Subject(s): Economic policy, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: exchange rates; European currencies; linkages; copula; Markov regime switching; tail dependence;
Summary/Abstract: The aim of the paper is to document how the dynamics of linkages between European currencies changes during a trading day according to the activity of different groups of traders, and show the impact of important events and news on the dependence structures. We analyze conditional dependencies between the Czech koruna, Hungarian forint, Polish zloty and the major European currencies (the euro, British pound and Swiss franc). The analysis is performed for the exchange rates against the US dollar. We consider daily returns calculated using the exchange rates quoted at different times of day. The dynamics of the dependencies is modeled by means of Markov regime switching copula models, and the strength of the linkages is described using dynamic Spearman’s rho coefficients and the dynamic coefficients of tail dependence. The approach used allows to scrutinize changes in the dynamics of the conditional dependence structure according to the time of day, which can be useful in recognizing diversification possibilities.

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