Tail Behaviour of the Euro

TL;DR

This paper empirically examines the tail risk of the Euro compared to other currencies, finding it generally stable and not substantially riskier, with less risk than the Yen and similar to the Deutsche Mark, especially during transitional periods.

Contribution

It applies Extreme Value Theory to assess Euro's tail risk and compares stability across different periods, providing new insights into Euro's risk profile during transition.

Findings

Euro's risk measures are comparable to other major currencies.

Euro remains stable under speculative attacks.

Euro is less risky than Yen and similar to Deutsche Mark.

Abstract

This paper empirically analyses risk in the Euro relative to other currencies. Comparisons are made between a sub period encompassing the final transitional stage to full monetary union with a sub period prior to this. Stability in the face of speculative attack is examined using Extreme Value Theory to obtain estimates of tail exchange rate changes. The findings are encouraging. The Euro's common risk measures do not deviate substantially from other currencies. Also, the Euro is stable in the face of speculative pressure. For example, the findings consistently show the Euro being less risky than the Yen, and having similar inherent risk to the Deutsche Mark, the currency that it is essentially replacing.