The power of subordinated Lévy models to depict the arrival of innovative information at world FX market

Abstract

Financial markets are very sensitive to all kinds of risk. Immediately after any unexpected announcement the volatility of market returns is suddenly increased and market prices can potentially fall down. However, the announcement can influence prices of only some assets, while prices of others remain stable. It follows that a different risk type indicates a need for distinct methods of risk modelling, measuring and managing. The aim of this paper is to identify if there is any similarity in risk estimation model performance across world FX rate market with respect to EUR. In particular, we show that CZK FX rate provide some good level of predictability and that all three considered FX rates from central Europe are well connected as concerns the reaction on unexpected events.