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

TL;DR

This paper explores the tail dependence between BRICS exchange rates and global economic uncertainty using high-frequency Twitter-based data and a novel time-varying copula model, revealing insights into safe-haven currencies during crises.

Contribution

It introduces a new copula framework to analyze tail dependence with high-frequency Twitter uncertainty data, providing novel insights into currency behavior during economic turmoil.

Findings

Indian, Russian, and South African currencies show no extreme dependence with uncertainty.

Brazilian and Chinese currencies exhibit increasing tail dependence, acting as safe havens.

During COVID-19, these currencies offered diversification opportunities.

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.