Heavy Tails in Foreign Exchange Markets: Evidence from Asian Countries

In recent years, Extreme Value Theory (EVT) has been proposed to deal with the heavy tailed distributions. This paper introduces L-moments and L-moment ratios based on EVT to analyze the distributional characteristics of exchange rates, and furthermore introduce the Kappa (κ) distribution to analyze the effects of globalization by understanding differences and similarities among Asian countries and developed countries before and after the crisis. We classify the behavior of exchange rates of East Asian countries and several financially developed countries into groups: the EURO zone, UK, Japan and some Asian countries. These entire groups have experienced the same or similar shocks during credit crunch in 2008; however the responses to the event for each group are different. We take extreme value point of view to analyze the effects of globalization by examining the exchange rates. For this purpose, we calculate the so called L-moments and L-moment ratios. Based on these estimates, we implement structural break test based on Kappa distribution showing the different aspects of the analyses. The most striking features are the different shape of L-moments and the coefficients of κ distribution among each group, and a closer examination of th