Evaluation and Analysis of Value at Risk Methodologies for Exchange Rate Risk in the Euro Market

Abstract: The deteriorating European economic situation has suggested the necessity of risk management in the exchange rate of EUR for governments and corporations, but there is few researches studying in this field. In this thesis, by choosing USD/EUR, JPY/EUR and GBP/EUR as subjects, with a focus on the availability of different methods to the estimation of exchange rate risk of EUR, we aim to calculate the VaR of those three kinds of exchange rates and try to find the most accurate model to measure exchange rate risk in different environments and periods. Based on the analysis of figures and the comparison among the results from different models, in this thesis, the conditional POT model and moving student t-distribution simulate the VaR for all exchange rates to EUR much better than others, whichever economic situations are. Besides this, no methods have significantly improvement for the measurement of VaR when economic situation changes. Meanwhile, the empirical rule that higher confidence level may improve the accuracy of estimation of VaR gets proven, especially for EVT model.