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A global hazard index for the world foreign exchange markets

Author

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  • Brousseau, Vincent
  • Scacciavillani, Fabio

Abstract

This paper proposes a forward-looking indicator of risk in the foreign exchange markets calculated from the implied volatilities of currency options according to the Garman-Kohlhagen model. We discuss the properties of such indicator and stress that it is related to a notion of risk that does not coincide with that of Gaussian risk underlying most mainstream models. We postulate that it is associated with a broader definition of risk, which we call hazard in order to avoid confusion. The properties of the Global Hazard Indicator (GHI) are assessed against the background of the market turbulence in 1998. This period has been characterized by abnormal fluctuations in the exchange rate markets spurred by a sequence of shocks in some emerging economies and in South East Asia, which have raised fear of contagion in developed countries. JEL Classification: F01, F31

Suggested Citation

  • Brousseau, Vincent & Scacciavillani, Fabio, 1999. "A global hazard index for the world foreign exchange markets," Working Paper Series 1, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:19991
    Note: 229699
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp001.pdf
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    Citations

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    Cited by:

    1. Zagaglia, Paolo, 2010. "Macroeconomic factors and oil futures prices: A data-rich model," Energy Economics, Elsevier, vol. 32(2), pages 409-417, March.

    More about this item

    Keywords

    currency markets; currency options; exchange rates; implied volatility; wild risk;
    All these keywords.

    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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