Dynamic Linkages in the Pairs (GBP/EUR, USD/EUR) and (GBP/USD, EUR/USD): How Do They Change During a Day?

In the paper, we document how conditional dependencies observed in the FOREX market change during a trading day. The analysis is performed for the pairs (GBP/EUR, USD/EUR) and (GBP/USD, EUR/USD) of exchange rates. We consider daily returns calculated using the exchange rates quoted at different hours of a day. The dynamics of the dependencies is modeled by means of 3-regime Markov regime switching copula models, and the strength of the linkages is described using dynamic Spearman’s rho and the dynamic coefficients of tail dependence. The established approach allows us to monitor the changes in the dependence structure.