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

Listed author(s):
  • Mudakkar, Syeda Rabab
  • Uppal, Jamshed Y.
  • Zaman, Khalid
  • Naseem, Imran
  • Shah, Ghias Ud Din

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999313003015
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 409-417

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Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:409-417
DOI: 10.1016/j.econmod.2013.07.030
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Zongrun Wang & Weitao Wu & Chao Chen & Yanju Zhou, 2010. "The exchange rate risk of Chinese yuan: Using VaR and ES based on extreme value theory," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(2), pages 265-282.
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  10. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  11. M. Ashraf Janjua, 2007. "Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(Special E), pages 126-152, September.
  12. Boothe, Paul & Glassman, Debra, 1987. "The statistical distribution of exchange rates: Empirical evidence and economic implications," Journal of International Economics, Elsevier, vol. 22(3-4), pages 297-319, May.
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  14. de Jesús, Raúl & Ortiz, Edgar & Cabello, Alejandra, 2013. "Long run peso/dollar exchange rates and extreme value behavior: Value at Risk modeling," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 139-152.
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