Risk dependence of CoVaR and structural change between oil prices and exchange rates: A time-varying copula model

Abstract This paper analyses the dynamic dependence between WTI crude oil and the exchange rates of the United States and China, taking structural changes of dependence into account by using six time-varying copula models. Upside and downside conditional values at risk (CoVaRs) are introduced specifically to measure the upward and downward risk dependences between oil prices and exchange rates. The findings indicate a structural break point of dependence exists between daily or weekly crude oil and the US dollar index. The dependence between crude oil and the RMB exchange rate is faintly positive with lower tail dependence, while the dependence between crude oil and the US dollar index is significantly negative with lower-upper and upper-lower tail dependence. Finally, the CoVaRs results show that there is significant risk spillover from crude oil to Chinese and the US exchange rate markets. Furthermore, the spillover effect is significantly asymmetry in Chinese exchange rate market in response to rising and falling oil returns, while the asymmetry of spillover effect for the US dollar index is not significant.