Extreme-value dependence: An application to exchange rate markets |
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Authors: | Viviana Fernandez |
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Institution: | Department of Industrial Engineering, Center for Applied Economics (CEA), University of Chile, Avenida Republica 701, Santiago, Chile |
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Abstract: | 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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Keywords: | Econophysics Exchange rate markets Extreme value theory |
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