Extreme Moves in Foreign Exchange Rates and Risk Limit Setting

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Extreme Moves in Foreign Exchange Rates and Risk Limit Setting

Author Info

Michel Dacorogna (Converium)
Peter Blum (Converium)

Additional information is available for the following registered author(s):

Michel M Dacorogna

Abstract

Foreign 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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Publisher Info
Paper provided by EconWPA in its series Risk and Insurance with number 0306004.

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Length: 12 pages
Date of creation: 19 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpri:0306004

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on HP A4; pages: 12 ; figures: included
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Find related papers by JEL classification:
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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)

References listed on IDEAS
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Olivier V. Pictet & Michel M. Dacorogna & Ulrich A. Muller, 1996. "Hill, Bootstrap and Jackknife Estimators for Heavy Tails," Working Papers 1996-12-10, Olsen and Associates. [Downloadable!]
Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July. [Downloadable!] (restricted)

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