Abstract:
Modelling sophisticated high-dimensional dependence structures for
financial assets in a portfolio framework require flexible dependence
models. In this paper, a regular vine-copula based model is employed to
analyze financial dependencies and co-movements of a six-dimensional
portfolio of currency exchange rates starting from January 2001 to April
2018. The regular-vine copula based model employs partial correlations
to construct the regular vine structure and offer superior flexibility in
the selection of the distributions to model financial dependence structure.
The model also captures the asymmetry between multivariate
variables using bivariate copulas with flexible tail dependence. Empirical
evidence suggests that co-movements in currency markets are most
likely to experience a crash and boom together thus, concluding that
currency markets are integrated due to the nature of the global financial
systems. The C-Vine copula specification is favoured over the other