Introducing a scale of market shocks

Gilles O. Zumbach, Michel Dacorogna, Jorgen L. Olsen and Richard B. Olsen
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Gilles O. Zumbach: Olsen & Associates
Jorgen L. Olsen: Olsen & Associates
Richard B. Olsen: Olsen & Associates

Finance from EconWPA

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.

Keywords: foreign exchange; extreme movements; volatility; financial markets; measurement (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2004-07-06
Note: Type of Document - pdf; pages: 25
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0407004

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