VaR : Exchange Rate Risk and Jump Risk

Abstract EN

Incorporating the Poisson jumps and exchange rate risk, this paper provides an analytical VaR to manage market risk of international portfolios over the subprime mortgage crisis.

There are some properties in the model.

First, different from past studies in portfolios valued only in one currency, this model considers portfolios not only with jumps but also with exchange rate risk, that is vital for investors in highly integrated global financial markets.

Second, in general, the analytical VaR solution is more accurate than historical simulations in terms of backtesting and Christoffersen's independence test (1998) for small portfolios and large portfolios.

In other words, the proposed model is reliable not only for a portfolio on specific stocks but also for a large portfolio.

Third, the model can be regarded as the extension of that of Kupiec (1999) and Chen and Liao (2009).