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Tail Estimates and the EMS Target Zone

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  • Koedijk, Kees G
  • Kool, Clemens J M

Abstract

Characteristically, distributions of exchange-rate returns are fat-tailed. We use a nonparametric tail-index estimator based on extreme value theory for seven EMS currencies between April 1979 and October 1991. We find that the behavior of the Belgian franc, the Danish Krone, the Frnech franc, and the Italian lira has become significantly less fat-tailed over time. We attribute this to the decline in the exchange-rate variance as observed in the EMS which according to the target-zone literature should lead to a convergence of fixed exchange-rate behavior to that of floating rates. A comparison of tail estimates for the Deutsche mark and dollar exchange rates supports this notion. Copyright 1994 by Blackwell Publishing Ltd.

Suggested Citation

  • Koedijk, Kees G & Kool, Clemens J M, 1994. "Tail Estimates and the EMS Target Zone," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 153-165, June.
    • Handle: RePEc:bla:reviec:v:2:y:1994:i:2:p:153-65
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    Cited by:

    1. Kyritsis, Evangelos & Serletis, Apostolos, 2018. "The zero lower bound and market spillovers: Evidence from the G7 and Norway," Research in International Business and Finance, Elsevier, vol. 44(C), pages 100-123.
    2. Victor Pontines, 2010. "Fat-tails and house prices in OECD countries," Applied Economics Letters, Taylor & Francis Journals, vol. 17(14), pages 1373-1377.
    3. John Cotter, 2005. "Tail behaviour of the euro," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 827-840.
    4. A. S. Andreou & G. A. Zombanakis & E. F. Georgopoulos & S. D. Likothanassis, 2000. "In search of a warning strategy against exchange-rate attacks: Forecasting tactics using artificial neural networks," Discrete Dynamics in Nature and Society, Hindawi, vol. 5, pages 1-17, January.
    5. Cotter, John, 2000. "Volatility and the Euro: an Irish perspective," MPRA Paper 3535, University Library of Munich, Germany.
    6. Christopher J. Neely, 1994. "Realignments of target zone exchange systems: what do we know?," Working Papers 1994-020, Federal Reserve Bank of St. Louis.
    7. Cotter, John, 2007. "Extreme risk in Asian equity markets," MPRA Paper 3536, University Library of Munich, Germany.
    8. Phornchanok Cumperayot & Casper G. de Vries, 2006. "Large Swings in Currencies driven by Fundamentals," Tinbergen Institute Discussion Papers 06-086/2, Tinbergen Institute.

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