The Fat-Tailedness of FX Returns
31 Pages Posted: 22 Mar 1998
Date Written: February 25, 1998
It is well known that returns on foreign exchange rates are not normal and tend to have fat-tailed distributions. Although the precise magnitude of the tail-fatness is crucial for applications such as risk analysis, little consensus exists in this respect due to estimation problems. In this paper, we apply a recent method to obtain unbiased inferences from the tails to re-examine the fat-tailedness of FX returns and show that the amount of fat-tailedness has been overestimated considerably. Additionally, goodness-of-fit statistics provide evidence of the appropriateness of assuming that a Student-t distribution underlies the data-generating process of FX returns. Both conclusions appear to hold more for floating than for fixed exchange rates.
JEL Classification: F31
Suggested Citation: Suggested Citation