Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 1999-10-08 Number: 99-078/4 Author-Name: Charles S. Bos Author-Email: cbos@few.eur.nl Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Ronald J. Mahieu Author-Workplace-Name: Rotterdam School of Management Author-Name: Herman K. van Dijk Author-Email: hkvandijk@few.eur.nl Author-Workplace-Name: Econometric Institute, Erasmus University Rotterdam Title: Daily Exchange Rate Behaviour and Hedging of Currency Risk Abstract: This discussion paper led to a publication in the 'Journal of Applied Econometrics', 2000, 15(6), pages 671-696.

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. Classification-JEL: C11; C15; C44; E47; G15 Keywords: Bayesian decision making; econometric modelling; exchange rates; risk management; forward contracts; stochastic volatility; GARCH File-Url: https://papers.tinbergen.nl/99078.pdf File-Format: application/pdf File-Size: 737280 bytes Handle: RePEc:tin:wpaper:19990078