Estimating the extreme financial risk of the Kenyan Shilling Versus US Dollar exchange rates

Abstract

In the last decade, world financial markets, including the Kenyan market have been characterized by significant instabilities. This has resulted to criticism on available risk management systems and motivated research on better methods capable of identifying rare events that have resulted in heavy consequences. With the high volatility of the Kenyan Shilling/Us dollar exchange rates, it is important to come up with a more reliable method of evaluating the financial risk associated with such financial data. In the recent past, extensive research has been carried out to analyze extreme variations that financial markets are subject to, mostly because of currency crises, stock market crashes and large credit defaults. We considered the behavior of the tails of financial series. More specially was focus on the use of extreme value theory to assess tail-related risk; we thus aim at providing a modeling tool for modern risk management. Extreme Value Theory provides a theoretical foundation on which we can build statistical models describing extreme events. This will help in predictability of such future rare events