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Conference Proceedings (1999), Globalization in the 21st Century, International Trade and Finance Association (ITFA), pp. 15-32

Correlation of Foreign Exchange Markets: an Extreme Value Study

This paper presents an empirical study of the correlation of foreign exchange markets focusing on periods of high volatility characterized by extreme variations in exchange rates. The modeling of the distribution of the changes in foreign exchange rates is based on multivariate extreme value theory. This statistical theory gives interesting results about the correlation of the changes in foreign exchange rates during extreme market conditions. Empirically, it is found that the correlation of the changes in the EUR/USD and EUR/JPY exchange rates tends to decrease in period of extreme volatility. Such a result is consistent with the hypothesis of normality for the distribution of changes in foreign exchange rates.

LONGIN, F. (1999). Correlation of Foreign Exchange Markets: an Extreme Value Study. In: Globalization in the 21st Century. International Trade and Finance Association (ITFA), pp. 15-32.