Extreme Moves in Foreign Exchange Rates and Risk Limit Setting
AbstractForeign exchange rates can be subject to considerable daily fluctuations (up to 5 percent within one day). This can, in certain cases, cause serious losses on open overnight positions. Given a maximum tolerable loss for a company, limits have to be set on open overnight positions in foreign currencies. Usually, these limits are determined by using a normal ("Gaussian") model for the daily fluctuations. In our study we illustrate how this common model sometimes quite strongly underestimates the actual extreme risks and, based on methods from the Extreme Value Theory (EVT), we propose and justify a more accurate model.
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Bibliographic InfoPaper provided by EconWPA in its series Risk and Insurance with number 0306004.
Length: 12 pages
Date of creation: 19 Jun 2003
Date of revision:
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on HP A4; pages: 12 ; figures: included
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extreme value theory; risk management; foreign exchange; time series analysis;
Find related papers by JEL classification:
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-25 (All new papers)
- NEP-IFN-2003-07-21 (International Finance)
- NEP-RMG-2003-06-25 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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