Multiple Change-Points Analysis for the Dependence Structures of Exchange Rate

Abstract

Dependence plays an important role in risk management. Copula gradually becomes a useful tool for risk analysis because of its description of correlation of portfolio in finance. By using the Mixed Gumbel Copula and generalized Pareto distribution, an appropriate model is created to describe the dependence of two exchange rates - English Pound and Eurodollar. Then, the changes in dependence structure, which is modeled by using change-point techniques, are discussed. The results indicate that the change of dependence structure between these exchange return rates have close relations to some important finance events. This methodology is applied in many financial fields such as capital pricing and risk management.