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When Can We Call It “Extraordinary Circumstances”? Examination of Currency Exchange Rate Shocks

Author

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  • Domagoj Sajter

    (University of J. J. Strossmayer, Croatia)

Abstract

Immediately after Swiss Central Bank withdrew from controlling CHF/EUR exchange rate in January 2015, CHF/HRK rate rose 15%, thereby substantially propagating Croatian credit default rates, non-performing loans and inciting broad socio-political consequences. The purpose of this paper is to examine (ab)normality of currency exchange rate distributions across Europe, focusing on Croatia, with the aim of identifying situations which could be defined as extraordinary circumstances. These can be embedded as triggering events in wide array of legal contracts. Historical data on exchange rates of European currencies is obtained and observed for its statistical distribution characteristics. “Fat tails” are found to be rule rather than exception, even witnessing shocks with magnitude of more than 100 standard deviations. Aside from lessons for risk management in a financial system which should endure these quakes, there are implications for policymakers, but above all for citizens struggling to fulfil their credit obligations under unexpected conditions.

Suggested Citation

  • Domagoj Sajter, 2015. "When Can We Call It “Extraordinary Circumstances”? Examination of Currency Exchange Rate Shocks," MIC 2015: Managing Sustainable Growth; Proceedings of the Joint International Conference, Portorož, Slovenia, 28–30 May 2015,, University of Primorska, Faculty of Management Koper.
    • Handle: RePEc:mgt:micp15:461-479
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    References listed on IDEAS

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