Estimation of foreign exchange market risk exposure

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management Department

Document Type

Archival Material/Manuscript

Publication Date

2020

Abstract

The study looks at the unexpected volatility in the foreign exchange market to determine the market risk exposure of the Philippine peso to the US dollar focusing on expected shortfall (ES). Estimates between historical and extreme value approach are compared. Peak-over-threshold (PoT) and block maxima (BM) techniques are employed to obtain the extreme observations with results showing that the former method is more reliable on risk estimation. Backtesting the model using the Traffic Light Approach, results show that the expected shortfall falls under the Green zone with no values exceeds the risk estimate throughout the year. This study is beneficial for traders in oversold position to manage their possible losses.

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Disciplines

Finance and Financial Management

Keywords

Foreign exchange market; Risk

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