Economic uncertainty and exchange rates linkage revisited: modelling tail dependence with high frequency data

ArXiv ID: 2511.05315 “View on arXiv”

Authors: Nourhaine Nefzi, Abir Abid

Abstract

The aim of this paper is to dig deeper into understanding the exchange rates and uncertainty dependence. Using the novel Baker et al. (2020)’s daily Twitter Uncertainty Index and BRICS exchange rates, we investigate their extreme tail dependence within an original time-varying copula framework. Our analysis makes several noteworthy results. Evidence for Indian, Russian and South African currencies indicates an elliptical copulas’ dominance implying neither asymmetric features nor extreme movements in their dependence structure with the global economic uncertainty. Importantly, Brazilian and Chinese currencies tail dependence is upward trending suggesting a safe-haven role in times of high global economic uncertainty including the recent COVID-19 pandemic. In such circumstances, these markets offer opportunities to significant gains through portfolio diversification.

Keywords: Tail Dependence, Copula Models, Time-Varying Correlation, Extreme Value Theory, Exchange Rates, Foreign Exchange (Forex)

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail
• Why: The paper employs a sophisticated time-varying copula framework with EGARCH modeling, requiring advanced mathematical understanding. It is highly data- and implementation-driven, using daily high-frequency data over a decade, covering major economic events and culminating in clear portfolio implications.

  flowchart TD
    A["Research Goal<br>Investigate tail dependence<br>between exchange rates & economic uncertainty"] --> B["Data & Inputs<br>Baker et al. (2020) Daily Twitter Uncertainty Index<br>BRICS Exchange Rates"]
    B --> C["Methodology<br>Time-Varying Copula Framework<br>Extreme Value Theory"]
    C --> D["Computational Process<br>Estimate Time-Varying Tail Dependence Coefficients"]
    D --> E["Key Findings<br>Elliptical Copula Dominance<br>(INR, RUB, ZAR): No Asymmetry/Safe-Haven"]
    D --> F["Key Findings<br>Upward Trending Tail Dependence<br>(BRL, CNY): Safe-Haven Role<br>Portfolio Diversification Opportunities"]