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Emerging markets and heavy tails

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  • Ibragimov, Marat
  • Ibragimov, Rustam
  • Kattuman, Paul

Abstract

Emerging countries are held to be subject to more frequent and more pronounced external and internal shocks than their developed counter-parts. This suggests that key variables pertaining to their markets, including their exchange rates, will be marked by greater likelihood of extreme observations and large fluctuations. We focus on the hypothesis that compared to developed country exchange rates, emerging country exchange rates will be more pronouncedly heavy-tailed. We find support for the hypothesis using recently proposed robust tail index estimation methods which, in particular, perform well under heavy-tailed dependent GARCH processes that are often used for modeling exchange rates. According to the estimation results reported in the paper, variances may be infinite for several emerging country exchange rates. Tail index values ζ=p∈(2.6,2.8) appear to be at the dividing boundary between the two sets of countries: while the moments of order p∈(2.6,2.8) are finite for most of the developed country exchange rates, they may be (or are) infinite for most of the emerging country exchange rates. We also study the impact of the on-going financial and economic crisis, and find that heavy-tailedness properties of most exchange rates did not change significantly with the onset of the crisis. At the same time, some foreign exchange markets have experienced structural changes in their heavy-tailedness properties during the crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 7 ()
Pages: 2546-2559

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2546-2559

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Heavy-tailedness; Tail indices; Robust estimation; Log–log rank-size regression; Exchange rates; Emerging countries; Financial crisis;

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References

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Cited by:
  1. Marat Ibragimov & Rustam Ibragimov & Rufat Khamidov, 2010. "Measuring Inequality in CIS Countries: Theory and Empirics," The wiiw Balkan Observatory Working Papers 088, The Vienna Institute for International Economic Studies, wiiw.
  2. M. Caivano & A. Harvey, 2013. "Two EGARCH models and one fat tail," Cambridge Working Papers in Economics 1326, Faculty of Economics, University of Cambridge.

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