A Mixed Dependence Between the Exchange Rate and International Crude Oil Returns: An Application of Dynamic Mixture Copula

In this study, the dynamic dependence between the international crude oil return and the exchange rate return for Taiwan is examined. Two mixture copulas (symmetric Joe-Clayton, SJC, and mixture of Gumbel and survival Gumbel, GSG) and two dynamic dependences (a Markov-switching type and an AR-like type) are considered in order to study whether the dynamic dependence is mixed and asymmetric. The empirical results show that the Markov-switching GSG copula performs the best when compared to other specifications investigated in this article. The relationship is positive and symmetric during periods of volatile crude oil prices, while it is independent during periods of stable crude oil prices.