ESTIMATING VALUE-AT-RISK (VAR) USING TIVEX-POT MODELS
Abstract
Financial institutions hold risks in their investments that can potentially affect their ability to serve clients.For banks to weigh their risks, Value-at-Risk (VaR) methodology is used, which involves studying the distribution
of losses and formulating a statistic from this distribution. From the myriad of models, this paper proposes a
method of formulating VaR using the time-varying parameter through explanatory variables (TiVEx) - peaks over
thresholds model (POT). The time varying parameters are linked to linear predictor variables through link
functions. To estimate parameters, maximum likelihood estimation is used with the time-varying parameters being
replaced from the likelihood function of the generalized Pareto distribution. The test series used for the paper was
the Philippine Peso-US Dollar exchange rate from January 2, 1997 to March 13, 2009. Explanatory variables
used were GARCH volatilities, quarter dummies, number of holiday-weekends passed, and annual trend. Three
selected permutations of TiVEx-POT models by dropping covariates were conducted. Results show that
econometric models and static POT models were better-performing in predicting losses from exchange rate risk,
but simple TiVEx models have potential as part of VaR modelling since it has consistent green status on the
number of exemptions and lower risk capital.
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.