The Effect of Capital Controls on Exchange Rate Risk

26 Pages Posted: 12 Feb 2009

See all articles by Stefan Straetmans

Stefan Straetmans

Maastricht University ; University of Antwerp - Faculty of Applied Economics

Roald J. Versteeg

Imperial College London - Accounting, Finance, and Macroeconomics

Date Written: February 12, 2009

Abstract

Many countries try to smooth their exchange rate movements by means of capital controls or otherwise. By the use of statistical extreme value analysis, we investigate if capital controls succeed in lowering the exchange rate volatility. We define forex volatility as the risk of extreme depreciations. For a sample of developed and emerging markets we find that capital controls are not effective in reducing this extreme depreciation risk. On the contrary, extreme depreciation risk is almost twice as high compared to an exchange rate regime without capital controls.

Keywords: Capital controls, Exchange Rates, Extreme Value Theory, Exchange rate risk, Extreme quantiles

JEL Classification: F21, F31

Suggested Citation

Straetmans, Stefan and Versteeg, Roald J., The Effect of Capital Controls on Exchange Rate Risk (February 12, 2009). Available at SSRN: https://ssrn.com/abstract=1341785 or http://dx.doi.org/10.2139/ssrn.1341785

Stefan Straetmans

Maastricht University ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.stefanstraetmans.com

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

Roald J. Versteeg (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom