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Extreme Moves in Foreign Exchange Rates and Risk Limit Setting

Michel Dacorogna and Peter Blum
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Peter Blum: Converium

Risk and Insurance from EconWPA

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.

Keywords: extreme value theory; risk management; foreign exchange; time series analysis (search for similar items in EconPapers)
JEL-codes: G22 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-rmg
Date: 2003-06-19
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on HP A4; pages: 12 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpri:0306004

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