Foreign exchange value-at-risk with multiple currency exposure – A multivariate and copula generalized autoregressive conditional heteroskedasticity approach

PDF

Authors
  1. Maybury, D.W.
Corporate Authors
Defence Research and Development Canada, Centre for Operational Research and Analysis, Ottawa ON (CAN)
Abstract
Large DND projects and acquisitions are exposed to more than one foreign currency at the same time which complicates management’s foreign exchange risk assessments. We extend the Centre for Operational Research and Analysis’ (CORA) in-house Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models to a full multivariate setting. Our extensions involve two models types: multivariate GARCH and copula-GARCH. We find that both models give qualitatively similar value-at-risk (VaR) estimates, and that both models provide a much improved risk assessment relative to the current practice – correcting VaR estimates on the order of 25% in cases in which multiple currency exposures are of similar size. Using the USDCAD, the EURCAD, and the GBPCAD, we demonstrate estimation techniques for each model. Finally, we show the strength of our improved models through a 100-day VaR calculation.

Il y a un résumé en français ici.

Report Number
DRDC-RDDC-2014-R62 — Scientific Report
Date of publication
01 Nov 2014
Number of Pages
58
DSTKIM No
CA039630
CANDIS No
800620
Format(s):
Electronic Document(PDF)

Permanent link

Document 1 of 1

Date modified: