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A value-at-risk analysis of carry trades using skew-GARCH models

A value-at-risk analysis of carry trades using skew-GARCH models Abstract We carry out a value-at-risk (VaR) analysis of an extremely popular strategy in the currency markets, namely, “carry trades,” whereby a position purchased in high interest rate currencies is funded by selling low interest rate currencies. Since the natural outcome of the truncated normal distribution of interest-rate spreads combined with the normal distribution of exchange rate returns is a skew-normal distribution, we consider a skew-normal innovation with zero mean for our analysis of carry trade returns using generalized autoregressive conditional heteroskedasticity (GARCH) models. The stress testing results reveal that skew-normal or densities are suitable for the measurement of VaR for carry trade returns involving, for example, taking up a long position in Australian Dollars or Argentine Peso which are funded by selling Japanese Yen. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

A value-at-risk analysis of carry trades using skew-GARCH models

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Publisher
de Gruyter
Copyright
Copyright © 2013 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2012-0028
Publisher site
See Article on Publisher Site

Abstract

Abstract We carry out a value-at-risk (VaR) analysis of an extremely popular strategy in the currency markets, namely, “carry trades,” whereby a position purchased in high interest rate currencies is funded by selling low interest rate currencies. Since the natural outcome of the truncated normal distribution of interest-rate spreads combined with the normal distribution of exchange rate returns is a skew-normal distribution, we consider a skew-normal innovation with zero mean for our analysis of carry trade returns using generalized autoregressive conditional heteroskedasticity (GARCH) models. The stress testing results reveal that skew-normal or densities are suitable for the measurement of VaR for carry trade returns involving, for example, taking up a long position in Australian Dollars or Argentine Peso which are funded by selling Japanese Yen.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: Sep 1, 2013

References

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    Azzalini
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    Barndorff
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    Lin
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    Giot
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    Fernandez
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    Jorion
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    Giot
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    Liu
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    McAleer
  • Tail Return Analysis of Credit Default Swaps Modelling
    Li
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    Bollerslev
  • Robust Approach to Joint Modeling of Mean and Scale Covariance for Longitudinal Data of and
    Lin
  • Further Results on a Class of Distributions which Includes the Normal Ones
    Azzalini
  • Evaluating Covariance Matrix Forecasts in a Value - at - Risk Framework of
    Lopez
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    Dowd
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    Jones
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    Duffie
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    Jones
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    Ferreira
  • The Algorithm Simple Extension of EM and ECM with Faster Monotone Convergence
    Liu
  • Normal Mixture GARCH Applications to Exchange Rate Modelling of
    Alexander
  • Modelling Financial Time Series Using GARCH - type Models and a Skewed Student Density mimeo de
    Lambert
  • The Extreme Value Approach to VaR An Introduction Financial News
    Dowd
  • Robust Mixture Modeling using Multivariate Skew Distributions and
    Lin
  • Modelling Skewness Dynamics in Series of Financial Data Discussion Paper de Statistique la
    Lambert
  • Parameter Expansion to Accelerate EM The EM Algorithm
    Liu
  • Selection of Value - at - Risk Models of
    Sarma
  • The Multivariate Skew Normal Distribution
    Azzalini
  • Evaluating Covariance Matrix Forecasts in a Value - at - Risk Framework of
    Lopez
  • Aprobabilistic Representation of the Skew - normal Distribution of
    Henze
  • Carry Trades Momentum Trading and the Forward Premium Anomaly of
    Baillie
  • Robust Approach to Joint Modeling of Mean and Scale Covariance for Longitudinal Data of and
    Lin
  • Conditional Value - at - Risk for General Loss Distributions of Banking and
    Rockafellar
  • On Bayesian Modeling of Fat Tails and of the
    Fernandez
  • CAViaR Conditional Autoregressive Value at Risk by Regression Quantiles of
    Engle
  • Carry Trades Currency Crashes
    Brunnermerier
  • Minimizing VaR for a Portfolio of Derivatives of Banking and
    Alexander
  • a Value at Risk Approach to Risk - return of
    Dowd
  • Statistical Applications of the Multivariate Skew - normal Distribution of the Series
    Azzalini
  • The Multivariate Skew Normal Distribution
    Azzalini
  • Robust Mixture Modeling using Multivariate Skew Distributions and
    Lin
  • Generalized Autoregressive Conditional Heteroskedasticity of
    Bollerslev
  • Tail Return Analysis of Credit Default Swaps Modelling
    Li
  • Carry Trades Currency Crashes
    Brunnermerier
  • Further Results on a Class of Distributions which Includes the Normal Ones
    Azzalini
  • Skew - normal Mixture and Markov - switching GARCH Processes in and Article
    Haas
  • Term Structures of Credit Spreads with Incomplete Accounting
    Duffie
  • Value - at - Risk : The New Benchmark for Managing Financial Risk New York
    Jorion
  • Evaluating Interval Forecasts
    Christoffersen
  • Conditional Heteroskedasticity in Asset Returns New Approach
    Nelson
  • Normal Mixture GARCH Applications to Exchange Rate Modelling of
    Alexander
  • The Algorithm Simple Extension of EM and ECM with Faster Monotone Convergence
    Liu