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A global hazard index for the world foreign exchange markets

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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 0001, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:19990001
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp001.pdf
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    References listed on IDEAS

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    1. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004.
    2. Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 72-96, March.
    3. 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 637-654, May-June.
    4. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    5. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    6. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477.
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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

    world foreign exchange markets;

    JEL classification:

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

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