Abstract
After the exchange rate reforms in 2005, China has transformed the fixed exchange rate system into a floating exchange rate system dominated by market supply and demand. Commercial banks will face with greater exchange rate risk. Therefore, how to estimate exchange rate risk and keep the optimal portfolio of foreign exchange is an important research subject. This article chooses the date of the RMB exchange rate against the dollar and the yen from the January 1, 2008 to May 21, 2012 as samples, describes the joint distribution of the two assets using Copula-Garch model, thus eventually works out the optimal holding ratio of the two foreign currency assets under minimal risk situations.
Highlights
With the establishment of the floating exchange rate system in China, the number of foreign assets held by commercial banks is increasing, as well as frequent financial crises in the international market, exchange rate risk has become an important source of financial risk of commercial banks
Huali Huang thinks that the value of the foreign exchange positions held by commercial banks as the foreign exchange market exchange rate volatility is the direct cause of commercial bank exchange rate risk, and changes in the exchange rate are mainly influenced by the
The results showed that copula model was the best way of value at risk (VaR) calculation [6]
Summary
With the establishment of the floating exchange rate system in China, the number of foreign assets held by commercial banks is increasing, as well as frequent financial crises in the international market, exchange rate risk has become an important source of financial risk of commercial banks. Rosenberg and Schuermann used the VaR method to measure risk, and they compared the accuracy of several models to calculate the VaR values. Min Chen, a domestic scholar, used the main calculation method of VaR model. She contrasts the pros and cons of various models by later accuracy test. The final conclusion is that GARCH (1, 1) model based on the t distribution has a better fitting effect in commercial bank exchange rate risk accuracy measurement. Through the empirical study of the euro and the dollar portfolio, results showed that the VaR model based on copula function can more accurately measure the risk of exchange rate [7] [8]
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