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Value at risk from econometric models and implied from currency options


  • James Chong

    (California State University, Northridge, USA)


This paper compares daily exchange rate value at risk estimates derived from econometric models with those implied by the prices of traded options. Univariate and multivariate GARCH models are employed in parallel with the simple historical and exponentially weighted moving average methods. Overall, we find that during periods of stability, the implied model tends to overestimate value at risk, hence over-allocating capital. However, during turbulent periods, it is less responsive than the GARCH-type models, resulting in an under-allocation of capital and a greater number of failures. Hence our main conclusion, which has important implications for risk management, is that market expectations of future volatility and correlation, as determined from the prices of traded options, may not be optimal tools for determining value at risk. Therefore, alternative models for estimating volatility should be sought. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • James Chong, 2004. "Value at risk from econometric models and implied from currency options," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(8), pages 603-620.
  • Handle: RePEc:jof:jforec:v:23:y:2004:i:8:p:603-620
    DOI: 10.1002/for.934

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    Cited by:

    1. Ewa Ratuszny, 2015. "Risk Modeling of Commodities using CAViaR Models, the Encompassing Method and the Combined Forecasts," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 15, pages 129-156.
    2. K. Triantafyllopoulos, 2008. "Multivariate stochastic volatility with Bayesian dynamic linear models," Papers 0802.0214,
    3. repec:eee:intfor:v:33:y:2017:i:4:p:848-863 is not listed on IDEAS
    4. Kim, Jun Sik & Ryu, Doojin, 2015. "Are the KOSPI 200 implied volatilities useful in value-at-risk models?," Emerging Markets Review, Elsevier, vol. 22(C), pages 43-64.
    5. Chuang, Chung-Chu & Wang, Yi-Hsien & Yeh, Tsai-Jung & Chuang, Shuo-Li, 2014. "Backtesting VaR in consideration of the higher moments of the distribution for minimum-variance hedging portfolios," Economic Modelling, Elsevier, vol. 42(C), pages 15-19.

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