The Fat-Tailedness of FX Returns

31 Pages Posted: 22 Mar 1998

See all articles by Ronald Huisman

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Kees C. G. Koedijk

Tilburg University - Department of Finance

Clemens J.M. Kool

Utrecht University - School of Economics

Franz C. Palm

University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 25, 1998

Abstract

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

Huisman, Ronald and Koedijk, Kees G. and Kool, Clemens J.M. and Palm, Franz C., The Fat-Tailedness of FX Returns (February 25, 1998). Available at SSRN: https://ssrn.com/abstract=69411 or http://dx.doi.org/10.2139/ssrn.69411

Ronald Huisman (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Clemens J.M. Kool

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Franz C. Palm

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-(0)43-3883833 (Phone)
+31-(0)43-3258535 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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