Modeling extreme risks in commodities and commodity currencies
Rodrigo Herrera () and
Pacific-Basin Finance Journal, 2018, vol. 51, issue C, 108-120
This paper examines extreme co-movements between the Australian and Canadian currencies, often known as commodity currencies, and gold and oil markets respectively. Here, two main approaches based on extreme value theory are compared in the context of explaining the co-movements between the markets in times of market instability. On the one hand, the intensity of the extreme events is represented by self-exciting marked point processes using a multivariate extension of the Hawkes-POT model, while contemporaneous co-movements are characterized utilizing a more traditional multivariate volatility model, the DBEKK-EVT model. It is found that intensity and volatility follow similar paths through time. The Hawkes-POT model reveals the unidirectional influence of the commodity on the currency, consistent with previous literature. Hawkes-POT model produces slightly more accurate Value at Risk results in the in-sample period, while the results are mixed in the backtesting period. Overall it seems as though the simpler multivariate volatility based approach produce forecasts of extreme risk that are comparable to the more complex Hawkes model.
Keywords: Commodity currency; BEKK; Hawkes model; Value at risk (search for similar items in EconPapers)
JEL-codes: C11 C58 C22 F30 (search for similar items in EconPapers)
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Working Paper: Modelling Extreme Risks in Commodities and Commodity Currencies (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:51:y:2018:i:c:p:108-120
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