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Copula-Models in Foreign Exchange Risk-Management of a Bank

Author

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  • Henry Penikas

    (Higher School of Economics, Russia)

Abstract

The paper deals with the optimization problem aiming to maximize the expected return given the amount of the bank’s open currency positions subject to the level of foreign exchange risk. The goal of the paper is to compare the efficiency of problem-solving assuming either multivariate normality, or using copulas to semi-parametrically simulate the empirical joint distribution. Back-testing is used both to support the choice of a proper copula‑model and to compare the different optimization approaches efficiency. Based on the research results it is shown that copula‑models should be preferred as enabling to receive higher yield given the same level of foreign exchange risk

Suggested Citation

  • Henry Penikas, 2010. "Copula-Models in Foreign Exchange Risk-Management of a Bank," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 17(1), pages 62-87.
    • Handle: RePEc:ris:apltrx:0045
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    References listed on IDEAS

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    Cited by:

    1. E. Petrova A. & Е. Петрова А., 2014. "Оценка Риска Остаточной Стоимости Секьюритизированного Пула Активов Оперативного Лизинга // A Securitized Pool Of Operating Lease Assets And Its Residual Value Risk Evaluation," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, issue 3, pages 127-138.
    2. Andrey Bedin & Alexander Kulikov & Andrey Polbin, 2023. "Copula-Based Modelling of Relationship Between Dollar/Rouble Exchange Rate and Oil Prices," Russian Journal of Money and Finance, Bank of Russia, vol. 82(3), pages 87-109, September.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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