Abstract
This paper proposes a procedure for using a GARCH or exponentially weighted moving average model in conjunction with historical simulation when computing value at risk. It involves adjusting historical data on each market variable to reflect the difference between the historical volatility of the market variable and its current volatility. We compare the approach using nine years of daily data on 12 exchange rates and 5 stock indices with the historical simulation approach and show that it is a substantial improvement.
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