Time-Varying Comovement of Foreign Exchange Markets: A GLS-Based Time-Varying Model Approach

How strongly are foreign exchange markets linked in terms of their similarities long-run fluctuations? Are they cointegrating? To analyze such “comovements,” we present a time-varying cointegration model for the rates currencies Canada, Japan, and UK vis-à-vis U.S. dollar from May 1990 through July 2015. Unlike previous studies, allow loading matrix vector error-correction (VEC) to be varying over time. Because VEC is associated with speed at which deviations relationship disappear, propose new degree market comovement based on measure strength or robustness Since determined by macrovariables, among implies these variables share common stochastic trends. Therefore, proposed measures comovement. Our main finding that has become stronger past quarter-century, but decreasing rate two major turning points: one 1995 other 2008.