Asymmetric dependence in the Philippine exchange rate markets: A copula approach
Date
2013-04
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Abstract
The use of copulas is getting attention in economics due to its application in detecting and analyzing exchange rate dependence asymmetry. This paper applies Patton's (2006) conditional copula method in detecting and analyzing exchange rate dependence for the Philippine peso vis-a-vis the US Dollar, the Japanese Yen, the Saudi Rial, the Euro, the Singaporean Dollar, and the Thai Baht. We find that the dependence behavior of each pairs of exchange rates changes in periods of political and economic uncertainty such as during the Philippine political turmoil of 2001 and during the World Financial Crisis of 2009. Majority of the currency pairs in question also exhibited more leaning towards joint depreciation than appreciation possibly due to the greater importance that monetary authorities put to competitiveness than to price stability in their intervention reaction functions over the sample period. The Philippine monetary authorities must take into account the large swings in exchange rates in one direction in targeting inflation and in implementing a growth strategy based on exchange rate targets.
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Keywords
exchange rate, asymmetric dependence, copula