Application of block maxima and PoT on the market risk exposure of PHP/USD

• Main Author: Bersola, Mary Cliedy Angelie I.
• Format: text
• Language: English
• Published: Animo Repository 2017
• Subjects: Foreign exchange rates > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/5362
• Institution: De La Salle University

Unexpected volatility in the foreign exchange (FX) market inspired this research to calculate the market risk exposure of PHP/USD. Given the different factors that impact the currency pairs fluctuation from the local and global arena, FX traders position is vulnerable to losses. The two most common risk measures are value at risk and expected shortfall (ES). This paper focused on ES due to its coherence and functionality to work under stressed scenarios. Following Extreme Value Theory, peak over threshold (PoT) and block maxima (BM) were implemented to gather the set of observations subject to study. Historical approach was also calculated for comparison with the extreme value approach (EVA). Results showed that risk estimates under EVA are higher than those under the historical method. Moreover, comparing EVA methodologies, PoT has a more reliable estimate than BM as the latter produced unusual figures due to loss of information. Back testing the model, Traffic Light Approach was used to test the accuracy which then falls under the green zone or the safe space. This implies that, for a year, there were no exceedance's or losses beyond the risk estimate.