A Revisit to the Dependence Structure between Stock and Foreign Exchange Markets: A Dependence-Switching Copula Approach

This paper develops a dependence-switching copula model to examine dependence and tail dependence for four different market statuses, namely, rising-stocks/appreciating-currency, falling-stocks/depreciating-currency, rising-stocks/depreciating-currency, and falling-stocks/appreciating-currency. The model is then applied to daily stock and foreign-exchange returns for six major industrial countries over the period 1990-2010. It is found that the dependence and tail dependence among the above four market statuses are asymmetric, for most countries, in the negative correlation regime, but symmetric in the positive correlation regime. These results enrich findings in existing literature and suggest that analyzing cross-market linkages within a time-invariant copula framework may not be appropriate.