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Description:
We offer a closer look at the frequency distribution of nominal price changes in the foreign exchange markets for a sample of 10 European exchange-rate pairs on the basis of a unique quarterly data set spanning 273 years. Our analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions of nominal exchange-rate changes are derived on the basis of fairly short data samples. We suggest that financial institutions and regulators should have an eye for the long-term historical perspective as a source of inspiration when designing worst case scenarios or severe stress scenarios in relation to risk assessments and stress tests.