Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 3 (2015), No. 1, Pages 1-14

DOI: 10.12735/jfe.v3i1p01

Download Full Text:

Heavy Tails in Foreign Exchange Markets: Evidence from Asian Countries

Joocheol Kim1 

1School of Economics, Yonsei University, Seoul, Korea

URL: https://doi.org/10.12735/jfe.v3i1p01Citations: 3 (Details)

To Cite this Article     Article Views: 828     Downloads: 505  Since deposited on 2015-03-28

Abstract

In recent years, Extreme Value Theory (EVT) has been proposed to deal with the heavy tailed distributions. This paper introduces L-moments and L-moment ratios based on EVT to analyze the distributional characteristics of exchange rates, and furthermore introduce the Kappa (κ) distribution to analyze the effects of globalization by understanding differences and similarities among Asian countries and developed countries before and after the crisis. We classify the behavior of exchange rates of East Asian countries and several financially developed countries into groups: the EURO zone, UK, Japan and some Asian countries. These entire groups have experienced the same or similar shocks during credit crunch in 2008; however the responses to the event for each group are different.

   We take extreme value point of view to analyze the effects of globalization by examining the exchange rates. For this purpose, we calculate the so called L-moments and L-moment ratios. Based on these estimates, we implement structural break test based on Kappa distribution showing the different aspects of the analyses. The most striking features are the different shape of L-moments and the coefficients of κ distribution among each group, and a closer examination of the L-moments diagram and parameters before and after the credit crunch in 2008 will reveal the different responses on the crisis and implications of the globalization.

   The results obtained by examining the behavior of exchange rate returns may be pertinent to economic policy making and macroeconomic forecasting. The finding that exchange rates of several Asian countries are typically more heavy-tailed than those of developed counterparts may reflect their susceptibility to more frequent and extreme external and internal shocks. The empirical results may also indicate that behavior of the distribution of extremes in Asian countries is time variant with a tendency to become fatter tailed during turbulent periods. Analysis on currency markets based on Kappa distribution shows that before financial crisis, South Korea, Taiwan and UK have relatively low second shape parameter than other countries. However, after the mortgage crisis, the parameters of all countries are close to 2. Therefore, we may say that after 2008, the distribution of all countries converge. From this we may conclude that before crisis, South Korea and Taiwan may not manage exchange rate market as others does, but after crisis, South Korea and Taiwan have sufficient power to manage exchange rate. Through the efforts to overcome global crisis, East Asian countries start to share the common feature of exchange rates with financially well developed countries around financial crisis.

JEL Classifications: C02, F65, G15

Keywords: emerging markets, exchange rate, L-moments, Kappa (κ) distribution, Extreme Value Theory (EVT)

To Cite this Article: Kim, J. (2015). Heavy tails in foreign exchange markets: Evidence from Asian countries. Journal of Finance and Economics, 3(1), 1-14. https://doi.org/10.12735/jfe.v3i1p01

Copyright © Joocheol Kim

Creative Commons License
This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

To make sure that you can receive messages from us, please add the 'todayscience.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.

Heavy Tails in Foreign Exchange Markets: Evidence from Asian Countries
reviwers