Advanced

On Modelling Extreme Foreign Exchange Volatility Using Copulas

Sandström, Anna and Bosaeus, Henrik (2015) FMS820 20151
Mathematical Statistics
Abstract
The price volatility is an important property to monitor in financial
trading. A volatile period implies threats of large losses, but at the
same time opportunities of higher gains. This makes accurate volatility
prediction models an important part of an algorithmic trading system.
This thesis work investigates the extreme value dependence between the
Foreign Exchange rate volatility and the rate of change of the offer-
and bid volumes present at the market. Each of the currency pairs
EURUSD, EURSEK and EURNOK will be analyzed for a one hour period on
three different days, where trading volumes and prices are given at
several levels at each point in time. The first part of the thesis aims
to transform the data into... (More)
The price volatility is an important property to monitor in financial
trading. A volatile period implies threats of large losses, but at the
same time opportunities of higher gains. This makes accurate volatility
prediction models an important part of an algorithmic trading system.
This thesis work investigates the extreme value dependence between the
Foreign Exchange rate volatility and the rate of change of the offer-
and bid volumes present at the market. Each of the currency pairs
EURUSD, EURSEK and EURNOK will be analyzed for a one hour period on
three different days, where trading volumes and prices are given at
several levels at each point in time. The first part of the thesis aims
to transform the data into one-dimensional data series, describing the
rate of fluctuation of price and volume. These are then subject to time
series model fitting in order to remove all forms of autocorrelations in
the data. The extreme values of the residual series are then extracted
using a block maxima approach, and modelled using the Generalized
Extreme Value (GEV) distribution. The quite novel approach of extreme
value copulas is then applied as a method of modelling the joint
dependence structure between the volume- and price extremes. The results
indicate dependence being present, in most cases appropriately described
by extreme value copula models. Further research on the topic is suggested. (Less)
Please use this url to cite or link to this publication:
author
Sandström, Anna and Bosaeus, Henrik
supervisor
organization
course
FMS820 20151
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Foreign Exchange, Volatility, ARMA-GARCH, Block Maxima, Extreme Values, Copula, Maximum Likelihood.
language
English
id
5464899
date added to LUP
2015-06-04 15:12:16
date last changed
2015-06-04 15:12:16
@misc{5464899,
  abstract     = {The price volatility is an important property to monitor in financial
trading. A volatile period implies threats of large losses, but at the
same time opportunities of higher gains. This makes accurate volatility
prediction models an important part of an algorithmic trading system.
This thesis work investigates the extreme value dependence between the
Foreign Exchange rate volatility and the rate of change of the offer-
and bid volumes present at the market. Each of the currency pairs
EURUSD, EURSEK and EURNOK will be analyzed for a one hour period on
three different days, where trading volumes and prices are given at
several levels at each point in time. The first part of the thesis aims
to transform the data into one-dimensional data series, describing the
rate of fluctuation of price and volume. These are then subject to time
series model fitting in order to remove all forms of autocorrelations in
the data. The extreme values of the residual series are then extracted
using a block maxima approach, and modelled using the Generalized
Extreme Value (GEV) distribution. The quite novel approach of extreme
value copulas is then applied as a method of modelling the joint
dependence structure between the volume- and price extremes. The results
indicate dependence being present, in most cases appropriately described
by extreme value copula models. Further research on the topic is suggested.},
  author       = {Sandström, Anna and Bosaeus, Henrik},
  keyword      = {Foreign Exchange,Volatility,ARMA-GARCH,Block Maxima,Extreme Values,Copula,Maximum Likelihood.},
  language     = {eng},
  note         = {Student Paper},
  title        = {On Modelling Extreme Foreign Exchange Volatility Using Copulas},
  year         = {2015},
}