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Asymmetry and downside risk in foreign exchange markets

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  • Shaun Bond
  • Stephen Satchell
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    Abstract

    This paper evaluates the double gamma distribution as a means of modelling asymmetry in the conditional distribution of financial data. To do this the model is applied to ten exchange rate series covering mature and emerging market countries. A second contribution of this paper is to highlight the link between the double gamma distribution and the measurement of the second lower partial moment (or semi-variance). The resulting empirical performance of the double gamma model is found to be mixed when compared to a symmetric GARCH-t model. Estimates of conditional downside risk based on the double gamma model are constructed for each series. The results for the Malaysian Riggit, Zimbabwe Dollar and the Korean Won demonstrate the extreme downside volatility experienced by these countries during the emerging markets currency crisis.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459808
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 12 (2006)
    Issue (Month): 4 ()
    Pages: 313-332

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    Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:313-332

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    Related research

    Keywords: Double-gamma; skewness; lower partial moments; GARCH;

    References

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    Cited by:
    1. Hu, Xiangling & Motwani, Jaideep G., 2014. "Minimizing downside risks for global sourcing under price-sensitive stochastic demand, exchange rate uncertainties, and supplier capacity constraints," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 398-409.

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