Top

Asia-Pacific Financial Markets

Published in:

14-11-2018

In search of robust methods for multi-currency portfolio construction by value at risk

Authors: Mei-Ling Tang, Trung K. Do

Published in: Asia-Pacific Financial Markets | Issue 1/2019

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

The main purpose of this paper is to select the most appropriate technique predicting precisely the exchange rate risk from three main approaches, namely, the Historical Simulation approach, the Variance–Covariance approach and the Monte Carlo Simulation approach. Our main finding shows that the historical simulation approach with exponentially weighted moving average, which exhibits the lowest out-of-sample loss, is the most appropriate method for value at risk estimation with regard to a multi-currency portfolio construction in the Taiwan foreign exchange market. Moreover, results in backtesting lend support to the accuracy of our proposed strategies at the 99% confidence level.

previous article Spatial-Temporal Modelling of Temperature for Pricing Temperature Index Insurance

next article Correction to: Some Further Results on the Tempered Multistable Approach

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Reminding to the history of Value at Risk, Markowitz (1952) published a paper on Value at risk (VaR). Only 3 months later, Roy (1952) published another paper also regarding to VaR. Although the two papers were independently written, they had similarities concerning optimization of portfolio risk and both used covariance to hedge and diversify portfolios. Mathematically, Markowitz and Roy presented calculations of VaR similar to the other.

With regard to the choice of the window of observations, we follow Hendricks (1996); and Jegadeesh and Titman (1993, 2001 to employ the choice of past 6 months return (equivalent to 125 days).

See Hull (2015).

Benartzi, S., & Thaler, R. H. (2001). A naive diversification strategies in defined contribution saving plans. A America Economic Review, 91(1), 79–98.CrossRef

Berkowitz, J., & O’Brien, J. (2002). How accurate are value-at-risk models at commercial banks? The Journal of Finance, 57(3), 1093–1111.CrossRef

Best, P. (1998). Implementing value at risk. West Sussex: John Wiley.CrossRef

Bredin, D., & Hyde, S. (2004). FOREX risk: Measurement and evaluation using value at risk. Journal of Business Finance and Accounting, 31, 1389–1417.CrossRef

Cabedo, J. D., & Moya, I. (2003). Estimating oil price ‘value at risk’ using the historical simulation approach. Energy Economics, 25(3), 239–253.CrossRef

Christie, S. (2005). Is the Sharpe Ratio Useful in Asset Allocation? Macquarie Applied Finance Centre Research Paper. https://doi.org/10.2139/ssrn.720801.

Christoffersen, P. (1998). Evaluating interval forecasts. International Economic Review, 39, 841–862.CrossRef

De Miguel, V., Garlappi, L., & Uppal, R. (2007). Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? The Review of Financial Studies, 22(5), 1915–1953.

De Schepper, A., & Heijnent, B. (2010). How to estimate the value at risk under incomplete information. Journal of Computational and Applied Mathematics, 233, 2213–2226.CrossRef

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427–431.

Dowd, K. (1998). Beyond value at risk: The new science of risk management. Hoboken: Wiley.

Gupta, A., & Liang, B. (2005). Do hedge funds have enough capital? A value-at-risk approach. Journal of Financial Economics, 77(1), 219–253.CrossRef

Hammoudeh, S., Malik, F., & McAleer, M. (2011). Risk management in precious metals. Quarterly Review of Economics and Finance, 51(4), 435–441.CrossRef

Hendricks, D. (1996). Evaluation of value at risk models using historical data. Economic Policy Review, 2(1), 39–69.

Hull, J. C. (2015). Risk management and financial institutions (4th ed.). New York: Wiley.

Hull, J., & White, A. (1998). Incorporating volatility updating into the historical simulation method for value at risk. Journal of Risk, 1, 5–19.CrossRef

Hung, J.-C., Lee, M.-C., & Liu, H.-C. (2008). Estimation of value-at-risk for energy commodities via fat-tailed GARCH models. Energy Economics, 30(3), 1173–1191.CrossRef

Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65–91.CrossRef

Jegadeesh, N., & Titman, S. (2001). Profitability of momentum strategies: An evaluation of alternative explanations. The Journal of Finance, 56(2), 699–720.CrossRef

Jorion, P. (2007). Value at risk: The new benchmark for managing financial risk (3rd ed.). New York: McGraw-Hill.

Kupiec, P. (1995). Techniques for verifying the accuracy of risk management models. Journal of Derivatives, 3, 73–84.CrossRef

Linsmeier, T. J., & Pearson, N. D. (1996). Risk measurement: An introduction to value at risk. Financial Analysts Journal, 52(6), 47–56.CrossRef

Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.

McAleer, M., Jimenez-Martin, J.-A., & Perez-Amaral, T. (2010). A decision rule to minimize daily capital charges in forecasting value-at-risk. Journal of Forecasting, 29(7), 617–634.CrossRef

Morgan, J. P. (1996). Risk metrics—Technical document (4th ed.). New York: Morgan Guaranty Trust Company.

Okunev, J., & White, D. (2003). Do momentum-based strategies still work in foreign currency markets? Journal of Financial and Quantitative Analysis, 38(2), 425–447.CrossRef

Orhan, M., & Köksal, B. (2012). A comparison of GARCH models for VaR estimation. Expert Systems with Applications, 39(3), 3582–3592.CrossRef

Pallota, M., & Zenti, R. (2000). Risk analysis for asset managers: Historical simulation, the bootstrap approach and value at risk calculation, working paper, RAS Asset Management.

Penza, P., & Bansal, P. K. (2001). Measuring market risk with value at risk. Hoboken: Wiley.

Pérignon, C., & Smith, D. (2010). The level and quality of value-at-risk disclosure by commercial banks. Journal of Banking & Finance, 34, 362–377.CrossRef

Roy, A. D. (1952). Safety first and the holding of assets. Econometrica, 20(3), 431–449.CrossRef

Schwert, G. W. (1989). Tests for unit roots: A Monte Carlo investigation. Journal of Business and Economic Statistics, 7, 147–160.

Sharpe, W. F. (1966). Mutual fund performance. The Journal of Business, 39(1), 119–138.CrossRef

So, M. K. P., & Yu, P. L. H. (2006). Empirical analysis of GARCH models in value at risk estimation. Journal of International Financial Markets, Institutions and Money, 16(2), 180–197.CrossRef

Srinivasan, A., & Shah, A. (2000). Improved techniques for using Monte Carlo in VaR estimation, National Stock Exchange Research Initiative, Working Paper.

Title: In search of robust methods for multi-currency portfolio construction by value at risk
Authors: Mei-Ling Tang
Trung K. Do
Publication date: 14-11-2018
Publisher: Springer Japan
Published in: Asia-Pacific Financial Markets / Issue 1/2019
Print ISSN: 1387-2834
Electronic ISSN: 1573-6946
DOI: https://doi.org/10.1007/s10690-018-9260-7

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 1/2019

Asset Prices and Changes in Risk within a Bivariate Model

Correction to: Some Further Results on the Tempered Multistable Approach

Spatial-Temporal Modelling of Temperature for Pricing Temperature Index Insurance

Stock Futures of a Flawed Market Index

Firm Value and the Impact of Operational Management

Re-examination of Fama–French Models in the Korean Stock Market