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Extreme-value dependence: An application to exchange rate markets

✍ Scribed by Viviana Fernandez

Publisher
Elsevier Science
Year
2007
Tongue
English
Weight
163 KB
Volume
377
Category
Article
ISSN
0378-4371

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✦ Synopsis

Extreme value theory (EVT) focuses on modeling the tail behavior of a loss distribution using only extreme values rather than the whole data set. For a sample of 10 countries with dirty/free float regimes, we investigate whether paired currencies exhibit a pattern of asymptotic dependence. That is, whether an extremely large appreciation or depreciation in the nominal exchange rate of one country might transmit to another. In general, after controlling for volatility clustering and inertia in returns, we do not find evidence of extreme-value dependence between paired exchange rates. However, for asymptotic-independent paired returns, we find that tail dependency of exchange rates is stronger under large appreciations than under large depreciations.

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