A value-at-risk approach to assess exchange risk associated to a public debt portfolio: the case of a small developing economy

This chapter deals with a delta-normal VaR application in the case of small developing economy. It assesses the exchange risk associated to the Tunisian public debt portfolio. We use daily spot exchange rates of the Tunisian dinar against the three main currencies composing the long run public debt portfolio, the dollar, the euro, and the yen. We are interested in the period from 1 January 1999 to 30 June 2006. We firstly demonstrate that the VaR approach can be used for a small developing economy provided that time series are neither too long nor too short. For daily data, we show that the optimal length to validate the assumption normality is annual. Secondly, we prove that the euro is the refuge value for managing the exchange risk in the Tunisian case. Only the systematic risk measured by the calculated betas associated to the dinar exchange rate versus the euro is negative. The component VaR analysis ascertains that the Japanese yen is the main source of exchange risk for the Tunisian debt portfolio. On the contrary, the euro constitutes a natural hedge against this risk. The euro component VaR values are slightly negative or null. Finally, we demonstrate that the VaR diversification degree is stable throughout the studied period. The non-diversified VaR represents 65% of the total VaR.