Modelling the Bivariate Dependence Structure of Exchange Rates Before and After the Introduction of the Euro : a Semi - Parametric Approach March 2009

This paper investigates the bivariate dependence structure for three pairs of exchange rates measured against the US dollar: Euro and Japanese yen, Euro and British pound, Euro and Swiss franc, over the period January 1994 to November 2007. The Deutsche mark (DM) is used for the pre-euro period. By using non-parametric plots and copula models estimated by semi-parametric methods, we are able to detect changes in the dependence structure from the pre-euro to the post-euro period for the pairs DM (Euro)Japanese yen, and DM (Euro)-British pound, with major changes occurring during the initial years of the launch of the new currency. For these two pairs of exchange rates we also capture asymmetric tail dependence, implying different degrees of comovements during appreciations and depreciations against the dollar. The dependence between the DM (Euro) and the Swiss franc remains unchanged, both in strength and structure, over the whole sample period, reflecting a marked tendency of the Swiss franc to follow the fluctuations of the DM and Euro against the dollar. The results may be of interest for international trade, international portfolio diversification and currency risk management.