Scaling conditional tail probability and quantile estimators

We present a novel procedure for scaling relatively high frequency tail probability and quantile estimates for the conditional distribution of returns.

Real & Nominal Foreign Exchange Volatility Effects on Exports – The Importance of Timing

This paper compares real and nominal foreign exchange volatility effects on exports. Using a flexible lag version of the Goldstein-Khan two-country imperfect substitutes model for bilateral trade, we identify the overall effect into both a timing as well as a size impact. We find that the size impact of forecasted foreign exchange volatility does not vary according to the measure used in terms of magnitude and direction. However, there are very different timing effects, when we compare real and nominal foreign exchange rate volatility.

Varying the VaR for Unconditional and Conditional Environments,

Accurate forecasting of risk is the key to successful risk management techniques. Using the largest stock index futures from twelve European bourses, this paper presents VaR measures based on their unconditional and conditional distributions for single and multi-period settings. These measures underpinned by extreme value theory are statistically robust explicitly allowing for fat-tailed densities. Conditional tail estimates are obtained by adjusting the unconditional extreme value procedure with GARCH filtered returns. The conditional modelling results in iid returns allowing for the use of a simple and efficient multi-period extreme value scaling law. The paper examines the properties of these distinct conditional and unconditional trading models. The paper finds that the biases inherent in unconditional single and multi-period estimates assuming normality extend to the conditional setting.

Modelling extreme financial returns of global equity markets

Extreme asset price movements appear to be more pronounced recently and have major consequences for an economy’s financial stability and monetary policies. This paper investigates the extreme behaviour of equity market returns and quantifies the probabilities of these losses. Taking fourteen major equity markets the study is able to ascertain similarities and divergences in the tail returns from around the world. To do so, it applies extreme value theory to equity indices representing American, Asian and European markets. The paper finds that all markets tail realisations are adequately modelled with the fat-tailed Fréchet distribution. Furthermore tail realisations associated with the downside of a distribution are greater than those associated with the upside, and extreme returns for Asian markets are usually larger than their European and American counterparts.

Uncovering Long Memory in High Frequency UK Futures

Accurate volatility modelling is paramount for optimal risk management practices. One stylized feature of financial volatility that impacts the modelling process is long memory explored in this paper for alternative risk measures, observed absolute and squared returns for high frequency intraday UK futures. Volatility series for three different asset types, using stock index, interest rate and bond futures are analysed. Long memory is strongest for the bond contract. Long memory is always strongest for the absolute returns series and at a power transformation of kLong Memory, APARCH, High Frequency Futures

Volatility and the Euro: an Irish perspective

With Ireland joining the Euro, exchange rate risk between participating states is gone. However, as is known, this new currency will continue to face exchange rate risk, and the general reduction of volatility on a day to day basis for Irish economic agents neglects to take account of possible extreme problems with the Euro. In this paper we will see that even though the Euro is a managed (irrevocably fixed) system, trade between Ireland and non-members, most notably the US, involves two separate currencies. This trade will require currency trading, leading to the possibility of large downside exposure to exchange rate risk for Irish exporters. In order to determine the extent to which the currencies can fluctuate, this paper examines exchange rate volatility using an Extreme Value approach. A number of different volatility scenarios are offered based on extrapolation of different exchange rate regimes under two broad headings, floating and managed. Using these headings, a number of actual systems are analysed including the ERM, the Snake in the Tunnel and Bretton Woods.