Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85450
Authors: 
Bos, Charles S.
Mahieu, Ronald J.
van Dijk, Herman K.
Year of Publication: 
1999
Series/Report no.: 
Tinbergen Institute Discussion Paper 99-078/4
Abstract: 
Exchange rates typically exhibit time-varying patterns in both means andvariances. The histograms of such series indicate heavy tails. In thispaper we construct models which enable a decision-maker to analyze theimplications of such time series patterns for currency risk management.Our approach is Bayesian where extensive use is made of Markov chainMonte Carlo methods. The effects of several model characteristics(unit roots, GARCH, stochastic volatility, heavy tailed disturbancedensities) are investigated in relation to the hedging decision strategies.Consequently, we can make a distinction between statistical relevanceof model specifications, and the economic consequences from a riskmanagement point of view. The empirical results suggest thateconometric modelling of heavy tails and time-varying means and variances paysoff compared to a efficient markets model. The different ways to measurepersistence and changing volatilities appear to strongly influence thehedging decision the investor faces.
Subjects: 
Bayesian decision making
econometric modelling
exchange rates
risk management
forward contracts
stochastic volatility
GARCH
JEL: 
C11
C15
C44
E47
G15
Document Type: 
Working Paper

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