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Tail Estimates and the Ems Target Zone *
Author(s) -
Koedijk Kees G.,
Kool Clemens J. M.
Publication year - 1994
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1994.tb00037.x
Subject(s) - economics , econometrics , estimator , exchange rate , nonparametric statistics , lira , us dollar , liberian dollar , variance (accounting) , convergence (economics) , value (mathematics) , index (typography) , statistics , monetary economics , mathematics , macroeconomics , computer science , accounting , finance , world wide web
Characteristically, distributions of exchange‐rate returns are fat‐tailed. We use a nonparametric tail‐index estimator based on extreme value theory for seven EMS currencies between April 1979 and October 1991. We find that the behavior of the Belgian franc, the Danish Krone, the French franc, and the Italian lira has become significantly less fat‐tailed over time. We attribute this to the decline in the exchange‐rate variance as observed in the EMS, which according to the target‐zone literature should lead to a convergence of fixed exchange‐rate behavior to that of floating rates. A comparison of tail estimates for the Deutsche mark and dollar exchange rates supports this notion.