Modelling Kenyan Foreign Exchange Risk Using Asymmetry Garch Models and Extreme Value Theory Approaches
International Journal of Data Science and Analysis
Volume 4, Issue 3, June 2018, Pages: 38-45
Received: Jul. 14, 2018;
Accepted: Aug. 17, 2018;
Published: Sep. 10, 2018
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Mutua Kilai, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Anthony Gichuhi Waititu, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Anthony Wanjoya, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
The Foreign Exchange Market in developing countries, Kenya being one of them is a key driving force for the development of a country economic growth. In the last decade, world financial markets have been characterized by significant instabilities and the currency exchange rate market is not an exception. As a consequence of the significant instabilities in the financial markets, this paper models the tail risk associated with the Kenya Shilling against the leading currencies, especially the one day ahead Value-at-Risk forecast in risk control, by using the two leading alternatives, the two-stage GARCH-EVT approach and the asymmetry GARCH models. In practice by applying the conditional Extreme Value Theory, the tail behaviour of the daily returns is modelled and thus the VaR while by using the asymmetry GARCH models, one models the whole distribution of the returns and thereafter estimates the Value at Risk. In addition to modelling the value at risk, we further examine the performance of the two leading alternatives with the daily log returns of leading currencies in the Kenyan Foreign Exchange market (US dollar, Sterling Pound and Euro) foreign currencies from the period January 2005 – August 2017 for trading days excluding weekends and holidays. The backtesting result indicate that the conditional Extreme Value Theory does not completely dominate the asymmetry GARCH models in estimating the VaR especially in the Sterling Pound and Euro Exchange Rates.
Anthony Gichuhi Waititu,
Modelling Kenyan Foreign Exchange Risk Using Asymmetry Garch Models and Extreme Value Theory Approaches, International Journal of Data Science and Analysis.
Vol. 4, No. 3,
2018, pp. 38-45.
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