Exchange Rate Risk and International Investment with Regime Switching Mixed Copula

다국어 초록 (Multilingual Abstract)

Benefits of international diversification heavily rely on the degree of dependence across securities. In this paper, we extend the results of Garcia and Tsafack (2007) regime switching mixed copula model to include Asian countries and explain the effect of exchange rate risk on the asymmetric dependence. Bootstrapped likelihood ratio tests show that asymmetric dependence of international market appears mostly insignificant when there is no exchange rate risk, while it appears significant with the presence of exchange rate risk. We suggest unwinding of foreign investment as one possible reason for these results.

목차 (Table of Contents)

• ABSTRACT
• 1. Introduction
• 2. Model
• 2.1. Kendall’s Tau
• 2.2. Tail Dependence
• 2.3. Exceedances Correlations
• 2.4. Marginal distribution
• 2.5. Multivariate dependence
• 3. Estimation
• 3.1. Decomposition of the likelihood function
• 3.2. Expectation Maximization Algorithm
• 3.3. Standard Errors of the Estimates
• 4. Data and Results
• 4.1. Marginal models
• 4.2. Joint Models
• 4.3. Hypothesis Testing
• 4.4. Hypothesis Test Results
• 5. Possible explanation of the disappearance of regime-switching
• 5.1. Investment using one currency on assets denominated in different currency.
• 5.2. Reaction of investors to losses in foreign assets
• 5.3. Effect of local currency denomination on dependence structure
• 6. Conclusion
• 7. References