Extreme Returns of the Foreign Exchange and the Stock Markets: Evidence from Vietnam

Abstract

Stock market and foreign exchange have been practical and professional since the existence of financial market. Besides containing many opportunities, stock market and foreign exchange market also have many implicit threats. This thesis studies the risk of investing in stock market through using Extreme Value Theory. To investigate the relationship between the foreign exchange rate and the stock market, Hill estimator is applied to estimate the tail index of the return distributions and then the tail-fatness is based on to estimate the VaR for the markets. The method to determine optimal threshold developed by Hall (1982) will be used to test the constancy of the tail. The correlation of extreme returns for two inherently unstable markets – the foreign exchange and the stock market – is also estimated to determine the relationship between theories, concepts, and practice of EVT.