Copula Approach in Multivariate Exchange Rate Analysis of Developing Countries in Eastern Europe

In: Mir ėkonomiki i upravelenija: World of economics and management, Volume 19, Issue 3, p. 58-72

Abstract

The work is aimed at modelling and analyzing joint behavior of currency exchange rates in 3 developing European countries – the Check Republic, Hungary, and Poland with the use of Copula functions. The study focuses only on internal relations with no consideration for any additional (external) factors. When building the models, several elliptic and Archimedean Copula families were estimated, and pair-Copula (vine) constructions of different families were considered. The work reveals the most appropriate in terms of consistency to the available data model based on the multivariate elliptical Student Copula. The work estimates the parameters of inherent interconnection narrowness of the currency rates under study based on the selected model built on the daily data in relation to RUB over the period 2007–2017. Besides, the paper considers two approaches to interval forecasting – with the use of correlated multiplier function and wave function which accounts the most likely value range as of the given date. The time-horizon of the study was 30 days. In the conclusion of the work, a comparative analysis of the proposed approaches was carried out, and the comparison was made between the forecasts and actual figures.