TY - JOUR
T1 - Identifying shifts in spread using the Cauchy CUSUM
T2 - An application to the Japanese yen/US dollar exchange rate
AU - Dukich, John M.
AU - Hawkins, Douglas M.
N1 - Funding Information:
This project was supported by the University of Minnesota Undergraduate Research Opportunity Program (UROP).
PY - 2010/3
Y1 - 2010/3
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=76549134998&partnerID=8YFLogxK
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U2 - 10.1080/09603100903373272
DO - 10.1080/09603100903373272
M3 - Article
AN - SCOPUS:76549134998
SN - 0960-3107
VL - 20
SP - 417
EP - 424
JO - Applied Financial Economics
JF - Applied Financial Economics
IS - 5
ER -