Foreign exchange risk in a managed float regime: A case study of Pakistani rupee

Syeda Rabab Mudakkar, Jamshed Uppal, Khalid Zaman, Imran Naseem and Ghias Ud Din Shah

Economic Modelling, 2013, vol. 35, issue C, 409-417

Abstract: The study examines applicability and performance of Value-at-Risk (VaR) models with respect to foreign exchange risk assessment within a managed float regime. Pakistani rupee offers an instructive case as it seems to manage its currency mainly against the US dollar, but to a lesser extent against the euro. We find that the distributional characteristics are quite different for the two currencies. We also find that the dynamic processes are remarkably different for the two exchange rates. The results indicate that compared with alternative competing models, the foreign exchange risk is better modeled using VaR based on Extreme Value Theory. Our findings underscore the importance of correctly specifying the return model in a dynamic framework.

Keywords: Value at Risk; Risk measure; GARCH; Extreme value theory; Back-testing (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:35:y:2013:i:c:p:409-417

DOI: 10.1016/j.econmod.2013.07.030

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