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

Author

Listed:
  • Mei-Ling Tang

    (Soochow University)

  • Trung K. Do

    (National Central University
    Da Nang University of Architecture)

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.

Suggested Citation

  • Mei-Ling Tang & Trung K. Do, 2019. "In search of robust methods for multi-currency portfolio construction by value at risk," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(1), pages 107-126, March.
    • Handle: RePEc:kap:apfinm:v:26:y:2019:i:1:d:10.1007_s10690-018-9260-7
    DOI: 10.1007/s10690-018-9260-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Value at risk; Historical simulation; Variance–Covariance approach; Monte-Carlo simulation; Multi-currency portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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