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Introducing a scale of market shocks

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  • Gilles O. Zumbach

    (Olsen & Associates)

  • Michel M. Dacorogna

    (Olsen & Associates)

  • Jorgen L. Olsen

    (Olsen & Associates)

  • Richard B. Olsen

    (Olsen & Associates)

Abstract

Two 'event' scales for financial markets, called 'scale of market shocks' (SMS), are introduced, which measure the importance of the market movements. These indices are based on the price volatility and are computed by integrating mapped asset volatilities over time horizons that range from 1 hour to 42 days. The first SMS is an absolute scale, or universal scale, allowing values of different assets to be compared directly. The second SMS is an adaptive scale, calibrated to the typical behavior of each asset, allowing the relative importance of market movements to be assessed. In principle, the SMS can be constructed for any market: the indices are computed from the price time series. In the foreign exchange (FX) market, each index is associated with a currency pair and an index per currency and an index for the whole market are derived from it.

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File URL: http://128.118.178.162/eps/fin/papers/0407/0407004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0407004.

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Length: 25 pages
Date of creation: 06 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0407004

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

Related research

Keywords: foreign exchange; extreme movements; volatility; financial markets; measurement;

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  1. Drost, F.C. & Nijman, T.E., 1990. "Temporal aggregation of GARCH processes," Discussion Paper 1990-66, Tilburg University, Center for Economic Research.
  2. Dominique M. Guillaume & Olivier V. Pictet & Michel M. Dacorogna, . "On the intra-daily performance of GARCH processes," Working Papers 1994-07-31, Olsen and Associates.
  3. Muller, Ulrich A. & Dacorogna, Michel M. & Olsen, Richard B. & Pictet, Olivier V. & Schwarz, Matthias & Morgenegg, Claude, 1990. "Statistical study of foreign exchange rates, empirical evidence of a price change scaling law, and intraday analysis," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1189-1208, December.
  4. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
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