Overnight Borrowing, Interest Rates and Extreme Value Theory

26 Pages Posted: 13 Sep 2004

See all articles by Ramazan Gencay

Ramazan Gencay

Simon Fraser University

Faruk Selcuk

Bilkent University - Department of Economics

Date Written: November 2001

Abstract

We examine the dynamics of extreme values of overnight borrowing rates in an inter-bank money market before a financial crisis during which overnight borrowing rates rocketed up to (simple annual) 4000 percent. It is shown that the generalized Pareto distribution fits well to the extreme values of the interest rate distribution. We also provide predictions of extreme overnight borrowing rates before the crisis. The examination of tails (extreme values) provides answers to such issues as what are the extreme movements expected in financial markets; have we already seen the largest moves; is there a possibility for even larger movements and, are there theoretical processes that can model the type of fat tails in the observed data? The answers to such questions are essential for proper management of financial exposures and laying ground for regulations.

Keywords: Financial crises, risk management, extreme value theory, overnight rate, federal funds

JEL Classification: G0, G1, C1

Suggested Citation

Gencay, Ramazan and Selcuk, Faruk, Overnight Borrowing, Interest Rates and Extreme Value Theory (November 2001). Available at SSRN: https://ssrn.com/abstract=588621 or http://dx.doi.org/10.2139/ssrn.588621

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Faruk Selcuk (Contact Author)

Bilkent University - Department of Economics ( email )

06800 Ankara
Turkey
+90 (312) 290 2074 (Phone)
+90 (312) 266-5140 (Fax)

HOME PAGE: www.bilkent.edu.tr/~faruk

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