Tail events in the FX markets since 1740

Kim Abildgren

Journal of Risk Finance, 2014, vol. 15, issue 3, 294-311

Abstract: Purpose - – The purpose of this paper is to explore the extent of the so-called “small-sample problem” within quantitative exchange-rate risk management. Design/methodology/approach - – The authors take a closer look at the frequency distribution of nominal price changes in the European foreign exchange markets. Findings - – The analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions are derived from fairly short data samples. Practical implications - – The authors suggest that financial institutions and regulators should have an eye for the long-term historical perspective when designing sensitivity tests or “worst case” scenarios in relation to risk assessments and stress tests. Originality/value - – The authors add to the literature by analysing the distribution of nominal exchange-rate fluctuations on the basis of a unique quarterly data set for ten European exchange-rate pairs covering a time span of 273 years constructed by the authors. To the best of the authors' knowledge this is the first study on nominal exchange-rate changes for a large number of exchange-rate pairs based on quarterly data spanning almost three centuries.

Keywords: Risk management; Economic history; Exchange-rate volatility; Fat-tailed distributions (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-04-2014-0041

DOI: 10.1108/JRF-04-2014-0041

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