Conditional dependence between oil prices and exchange rates in BRICS countries : an application of the copula-GARCH model

We studied the dependence structure between West Texas Intermediate (WTI) oil prices and the exchange rates of BRICS1 countries, using copula models. We used the Normal, Plackett, rotated-Gumbel, and Student's t copulas to measure the constant dependence, and we captured the dynamic dependence using the Generalized Autoregressive Score with the Student's t copula. We found that negative dependence and significant tail dependence exist in all pairs considered. The Russian Ruble (RUB)-WTI pair has the strongest dependence. Moreover, we treated five exchange rate-oil pairs as portfolios and evaluated the Value at Risk and Expected Shortfall from the time-varying copula models. We found that both reach low values when the oil price falls sharply.