A Global Hazard Index for the World Foreign Exchange Markets

ECB Working Paper No. 1

32 Pages Posted: 2 Aug 2000

See all articles by Vincent Brousseau

Vincent Brousseau

European Central Bank, Directorate General Economics

Fabio Scacciavillani

Goldman Sachs - Economics Research Department

Date Written: May 1999

Abstract

This paper proposes a forward-looking indicator of risk in the foreign exchange markets calculated from the implied volatilities of currency options according to the Garman-Kohlhagen model. We discuss the properties of such indicator and stress that it is related to a notion of risk that does not coincide with that of Gaussian risk underlying most mainstream models. We postulate that it is associated with a broader definition of risk, which we call hazard in order to avoid confusion. The properties of the Global Hazard Index (GHI) are assessed against the background of the market turbulence in 1998. This period has been characterized by abnormal fluctuations in the exchange rate markets spurred by a sequence of shocks in some emerging economies and in South East Asia, which have raised fear of contagion in developed countries.

Keywords: currency markets, exchange rates, wild risk, currency options, implied volatility, foreign exchange crises

JEL Classification: F01, F31, G13, G15

Suggested Citation

Brousseau, Vincent and Scacciavillani, Fabio, A Global Hazard Index for the World Foreign Exchange Markets (May 1999). ECB Working Paper No. 1, Available at SSRN: https://ssrn.com/abstract=235001

Vincent Brousseau

European Central Bank, Directorate General Economics ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Fabio Scacciavillani (Contact Author)

Goldman Sachs - Economics Research Department ( email )

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom
+44 20 755 25254 (Phone)

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