Proceedings of the 18th International Academic Conference, London

MODELING DEPENDENCY AND CONDITIONAL VOLATILITY BETWEEN ASIAN ECONOMIC COMMUNITY (AEC) COUNTRY EXCHANGE RATE AND INFLATION USING THE COPULA-GARCH MODEL.

KANTA TANNIYOM, PAPONPAT TAVEEAPIRADEECHAROEN, PRAPATCHON JARIYAPAN

Abstract:

Structural dependence and conditional volatility are solutions to comprehend financial crisis behavior. Investigation has been widely analyzed especially to what circumstances occurred in EURO zone countries. This leads many economic researchers attention to prepare uncertainty beyond relationship and variation. This paper aims at estimating the dependency and conditional volatilities the growth rate of AEC exchange rate and inflation of Thailand using COPULA-GARCH models. The motivation of this journal is to reach the most rational policy for BANK of Thailand, since exchange rate is one among tangible strategies. Both margins are distributed by skewed-t, and ARMA-GARCH is fitted to monthly data. Growth rate of those variables residual independence are checked by bivariate random dependence which is represented by P-Value and for Marginal Persistence Volatilities will be tested by using Dynamic Conditional Correlation Method, Fifteen static copulas are applied to those dependencies. AIC, SIC and Kendall’s tau will be an appropriate approach to assess results. Empirical results show huge coefficients of correlations between AEC exchange rates and Thailand inflation in the short-term period and slightly correlated in the long-term period of conditional volatility and dependency. In addition, there is evidence to convince that it was a positive relationship.

Keywords: Copula; Conditional Valatility; ARMA-GARCH; Exchange Rate; Dynamic Conditional Correlation; Bivariate Independent Test

DOI: 10.20472/IAC.2015.018.121

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