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South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

Abstract

KEMDA, Lionel Establet; HUANG, Chun-Kai  and  CHINHAMU, Knowledge. Value-at-risk for the USD/ZAR exchange rate: The Variance-Gamma model. S. Afr. j. econ. manag. sci. [online]. 2015, vol.18, n.4, pp.551-566. ISSN 2222-3436.  http://dx.doi.org/10.17159/2222-3436/2015/V18N4A8.

A country's level of exchange risk is closely linked to its financial stability, on a macro-economic scale. South African exchange rates, in particular, have a significant impact on imports, inflation, consumer prices and monetary policies. Consequently, it is imperative for economists and investors to assess accurately the associated exchange risks. Exchange rates, like most financial time series, are leptokurtic and contradict the classical Gaussian assumption. We therefore introduce subclasses of the generalised hyperbolic distribution as alternative models and contrast these with the normal distribution. We conclude that the variance-gamma model is the most robust for describing the log-returns of daily USD/ZAR exchange rates and their related Value-at-Risk (VaR) estimates. The model selection methodologies utilised in our analyses include the robust Kolmogorov-Smirnov test and the Akaike information criterion. Backtesting on the adequacy of VaR estimates is also performed using the Kupiec likelihood ratio test.

Keywords : South Africa; USD/ZAR exchange rate; Value-at-Risk; variance-gamma distribution; generalised hyperbolic distribution; robust Kolmogorov-Smirnov; Akaike; Kupiec.

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