Conditional dependence structure between oil prices and exchange rates: A copula-GARCH approach

We study the conditional dependence structure between crude oil prices and U.S. dollar exchange rates using a copula-GARCH approach. Various copula functions of the elliptical, Archimedean and quadratic families are used to model the underlying dependence structure in both bearish and bullish market periods. Over the period from January 2000 to February 2011, we …nd evidence of signi…cant and symmetric dependence for almost all the oil-exchange rate pairs considered. The rise in the price of oil is found to be associated with the depreciation of the dollar. Our results also indicate that Student-t copulas best capture the extreme dependence, and that taking the extreme comovement into account leads to improve the accuracy of VaR forecasts.