EMPIRICAL DISTRIBUTIONS OF FOREIGN EXCHANGE RATES UNDER THE FLOATING EXCHANGE RATE SYSTEM

The shape of foreign exchange probability distributions is important in practical applications of theoretical models of international finance. This paper extends previous analyses of the shape of exchange rate distributions by considering a wider range of candidate processes. The results indicate that the logistic distribution provides the best representation of currency returns for four major currencies (the German mark, Japanese yen, Canadian dollar and British pound) against the U. S. dollar between January 1973 and July 1995. These results are significant because they show that in spite of the apparent increase in exchange rate variability during the 1980s and 1990s there has been a stable underlying distribution for major currencies.