Extreme returns: The case of currencies

Osler, Carol L.; Savaşer, Tanseli

doi:10.1016/j.jbankfin.2011.03.016

Cited by 21 publications

(10 citation statements)

References 48 publications

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“…Hashimoto et al (2010) show that a "run" 1 has some predictive power on the direction of the next price move. Finally, the mechanisms behind FX rates tail events are studied by Osler and Savaser (2011), who found that price-contingent trading may be a major source of extreme returns.…”

Section: Introductionmentioning

confidence: 99%

Tick size reduction and price clustering in a FX order book

Lallouache

Abergel

2014

Physica A: Statistical Mechanics and its Applications

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We investigate the statistical properties of the EBS order book for the EUR/USD and USD/JPY currency pairs and the impact of a ten-fold tick size reduction on its dynamics. A large fraction of limit orders are still placed right at or halfway between the old allowed prices. This generates price barriers where the best quotes lie for much of the time, which causes the emergence of distinct peaks in the average shape of the book at round distances. Furthermore, we argue that this clustering is mainly due to manual traders who remained set to the old price resolution. Automatic traders easily take price priority by submitting limit orders one tick ahead of clusters, as shown by the prominence of buy (sell) limit orders posted with rightmost digit one (nine).

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Section: Introductionmentioning

confidence: 99%

Tick size reduction and price clustering in a FX order book

Lallouache

Abergel

2014

Physica A: Statistical Mechanics and its Applications

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“…First, as established in e.g. Westerfield (1977), and later Osler and Savaser (2011), the return distribution of foreign exchange rates exhibit excess kurtosis, i.e. possess fat tails compared to the normal distribution.…”

Section: Foreign Exchange Rate Modelingmentioning

confidence: 95%

Corporate hedging: an answer to the “how” question

Blomvall

Ekblom

2017

Ann Oper Res

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We develop a stochastic programming framework for hedging currency and interest rate risk, with market traded currency forward contracts and interest rate swaps, in an environment with uncertain cash flows. The framework captures the skewness and kurtosis in exchange rates, transaction costs, the systematic risks in interest rates, and most importantly, the term premia which determine the expected cost of different hedging instruments. Given three commonly used objective functions: variance, expected shortfall, and mean log profits, we study properties of the optimal hedge. We find that the choice of objective function can have a substantial effect on the resulting hedge in terms of the portfolio composition, the resulting risk and the hedging cost. Further, we find that unless the objective is indifferent to hedging costs, term premia in the different markets, along with transaction costs, are fundamental determinants of the optimal hedge. Our results also show that to reduce risk properly and to keep hedging costs low, a rich-enough universe of hedging instruments is critical. Through out-of-sample testing we validate the findings of the in-sample analysis, and importantly, we show that the model is robust enough to be used on real market data. The proposed framework offers great flexibility regarding the distributional assumptions of the underlying risk factors and the types of hedging instruments which can be included in the optimization model.

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“…There is however no consensus on the exact form of the distribution, which varies with the timescale. The mechanisms behind FX rates tail events are studied by Osler and Savaser (2011), they have found that pricecontingent trading may be a major source of extreme returns. Figure 1 shows the empirical cumulative distribution of the EUR/USD and USD/JPY positive log-returns.…”

Section: Fat-tailsmentioning

confidence: 99%

Empirical Properties of the Foreign Exchange Interdealer Market

Lallouache

Abergel

2013

SSRN Journal

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Using a new high frequency quality data set we provide a precise empirical study of the interdealer spot market. We check that the main stylized facts of financial time series are valid for the FX market: fat-tailed distribution of returns, aggregational normality and volatility clustering. We report two standard microstructure phenomena: microstructure noise effects in the signature plot and the Epps effect. We find an unusual shape for the average book, the spread distribution being bimodal. We construct the order flow and analyse its main characteristics: volume, placement, arrival intensity and sign. Many quantities have been dramatically affected by the decrease of the tick size in March 2011. We argue that the coexistence of manual traders and algorithmic traders, who react differently to the new tick size, leads to a strong price clustering in all types of orders and affects the price formation.

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Extreme returns: The case of currencies

Cited by 21 publications

References 48 publications

Tick size reduction and price clustering in a FX order book

Tick size reduction and price clustering in a FX order book

Corporate hedging: an answer to the “how” question

Empirical Properties of the Foreign Exchange Interdealer Market

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