Heavy-Tailedness and Volatility in Emerging Foreign Exchange Markets: Theory and Empirics

Emerging economic, financial and foreign exchange markets are subject to more extreme external and internal shocks than their developed counter-parts. The higher degree of volatility suffered by these economies leads to the expectation that heavy-tailedness properties for key variables in these markets, including foreign exchange rates, will be more pronounced. We focus on this hypothesis using recently proposed robust tail index estimation methods applied to data on exchange rates and trading volumes for a number of developing countries with economies in transition. We find that the tail indices indeed tend to be smaller in emerging foreign exchange markets compared to the developed economies, and thus are more susceptible to internal and external shocks. In particular, the tail index estimates we obtain indicate that, in contrast to developed economies, variances may be infinite for foreign exchange rates in the most of emerging economies considered. In certain heavily regulated economies, the means of foreign exchange rates may be infinite as well.