n South African Journal of Economic and Management Sciences - Value-at-risk for the USD/ZAR exchange rate : the variance-gamma model
|Article Title||Value-at-risk for the USD/ZAR exchange rate : the variance-gamma model|
|© Publisher:||University of Pretoria|
|Journal||South African Journal of Economic and Management Sciences|
|Affiliations||1 University of KwaZulu-Natal, 2 University of KwaZulu-Natal and 3 University of Cape Town|
|Publication Date||Jan 2015|
|Pages||551 - 556|
|Keyword(s)||Akaike, Generalised hyperbolic distribution, Kupiec, Robust Kolmogorov-Smirnov, South Africa, USD/ZAR exchange rate, Value-at-Risk and Variance-gamma distribution|
ISI Social Science
A country's level of exchange risk is closely linked to its financial stability, on a macro-economic scale. South African exchange rates, in particular, have a significant impact on imports, inflation, consumer prices and monetary policies. Consequently, it is imperative for economists and investors to assess accurately the associated exchange risks. Exchange rates, like most financial time series, are leptokurtic and contradict the classical Gaussian assumption. We therefore introduce subclasses of the generalised hyperbolic distribution as alternative models and contrast these with the normal distribution. We conclude that the variance-gamma model is the most robust for describing the log-returns of daily USD/ZAR exchange rates and their related Value-at-Risk (VaR) estimates. The model selection methodologies utilised in our analyses include the robust Kolmogorov-Smirnov test and the Akaike information criterion. Back testing on the adequacy of VaR estimates is also performed using the Kupiec likelihood ratio test.
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