Identifying shifts in spread using the Cauchy CUSUM: an application to the Japanese yen/US dollar exchange rate

• Autores: John M. Dukich, Douglas M. Hawkins
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 20, Nº. 4-6, 2010, págs. 417-424
• Idioma: inglés
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• Resumen

  • It is well known that the log price relative of floating exchange rates, as well as a variety of other commodities and securities, does not follow a normal distribution but instead tends to be characterized by a heavy-tailed stable Paretian distribution. Specifically, we illustrate this property of floating exchange rates with the Japanese yen/US dollar exchange rate. Furthermore, we show that the distribution itself changes from time to time, with periods of sustained shifts in volatility. To capture the heavy-tailed nature of the distribution, we develop a Cumulative Sum (CUSUM) chart based on the Cauchy distribution to identify these periods of differing volatility.