Daily Exchange Rate Behaviour and Hedging of Currency Risk

Charles Bos, Ronald Mahieu and Herman van Dijk

No 99-078/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a publication in the 'Journal of Applied Econometrics', 2000, 15(6), pages 671-696.

Exchange rates typically exhibit time-varying patterns in both means andvariances. The histograms of such series indicate heavy tails. In thispaper we construct models which enable a decision-maker to analyze theimplications of such time series patterns for currency risk management.Our approach is Bayesian where extensive use is made of Markov chainMonte Carlo methods. The effects of several model characteristics(unit roots, GARCH, stochastic volatility, heavy tailed disturbancedensities) are investigated in relation to the hedging decision strategies.Consequently, we can make a distinction between statistical relevanceof model specifications, and the economic consequences from a riskmanagement point of view. The empirical results suggest thateconometric modelling of heavy tails and time-varying means and variances paysoff compared to a efficient markets model. The different ways to measurepersistence and changing volatilities appear to strongly influence thehedging decision the investor faces.

Keywords: Bayesian decision making; econometric modelling; exchange rates; risk management; forward contracts; stochastic volatility; GARCH (search for similar items in EconPapers)
JEL-codes: C11 C15 C44 E47 G15 (search for similar items in EconPapers)
Date: 1999-10-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Daily Exchange Rate Behaviour and Hedging of Currency Risk (2001)
Journal Article: Daily exchange rate behaviour and hedging of currency risk (2000)
Working Paper: Daily Exchange Rate Behaviour and Hedging of Currency Risk (2000)
Working Paper: Daily exchange rate behaviour and hedging of currency risk (2000)
Working Paper: Daily exchange rate behaviour and hedging of currency risk (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:19990078

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