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Emerging markets and heavy tails

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Title: Emerging markets and heavy tails
Authors: Ibragimov, M
Ibragimov, R
Kattuman, P
Item Type: Journal Article
Abstract: Emerging countries are held to be subject to more frequent and more pronounced external and internal shocks than their developed counter-parts. This suggests that key variables pertaining to their markets, including their exchange rates, will be marked by greater likelihood of extreme observations and large fluctuations. We focus on the hypothesis that compared to developed country exchange rates, emerging country exchange rates will be more pronouncedly heavy-tailed. We find support for the hypothesis using recently proposed robust tail index estimation methods which, in particular, perform well under heavy-tailed dependent GARCH processes that are often used for modeling exchange rates. According to the estimation results reported in the paper, variances may be infinite for several emerging country exchange rates. Tail index values ζ = p ∈ (2.6, 2.8) appear to be at the dividing boundary between the two sets of countries: while the moments of order p ∈ (2.6, 2.8) are finite for most of the developed country exchange rates, they may be (or are) infinite for most of the emerging country exchange rates. We also study the impact of the on-going financial and economic crisis, and find that heavy-tailedness properties of most exchange rates did not change significantly with the onset of the crisis. At the same time, some foreign exchange markets have experienced structural changes in their heavy-tailedness properties during the crisis.
Issue Date: 1-Jul-2013
Date of Acceptance: 8-Feb-2013
URI: http://hdl.handle.net/10044/1/67750
DOI: https://dx.doi.org/10.1016/j.jbankfin.2013.02.019
ISSN: 1872-6372
Publisher: Elsevier
Start Page: 2546
End Page: 2559
Journal / Book Title: Journal of Banking and Finance
Volume: 37
Issue: 7
Copyright Statement: © 2013 Elsevier Ltd. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence http://creativecommons.org/licenses/by-nc-nd/4.0/
Keywords: Social Sciences
Business, Finance
Economics
Business & Economics
Heavy-tailedness
Tail indices
Robust estimation
Log-log rank-size regression
Exchange rates
Emerging countries
Financial crisis
EXCHANGE RATE REGIMES
SIZE DISTRIBUTION
DIVERSIFICATION
DISTRIBUTIONS
INEQUALITY
TAILEDNESS
INFERENCE
BEHAVIOR
RETURNS
CRISIS
0102 Applied Mathematics
1502 Banking, Finance And Investment
Finance
Publication Status: Published
Online Publication Date: 2013-03-13
Appears in Collections:Imperial College Business School