Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2001-02-08 Number: 01-017/4 Author-Name: Charles S. Bos Author-Email: firstname.lastname@example.org Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Ronald J. Mahieu Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Herman K. van Dijk Author-Email: email@example.com Author-Workplace-Name: Erasmus University Rotterdam Title: Daily Exchange Rate Behaviour and Hedging of Currency Risk Abstract: This discussion paper resulted in a publication in the 'Journal of Applied Econometrics', 2000, 15(6), 671-696.
We construct models which enable a decision-maker to analyze the implications oftypical timeseries patterns of daily exchange rates for currency risk management. Ourapproach is Bayesianwhere extensive use is made of Markov chain Monte Carlo methods. The effects ofseveral modelcharacteristics (unit roots, GARCH, stochastic volatility, heavy taileddisturbance densities) areinvestigated in relation to the hedging strategies. Consequently, we can make adistinctionbetween statistical relevance of model specifications, and the economicconsequences from a riskmanagement point of view. We compute payoffs and utilities from severalalternative hedgestrategies. The results indicate that modelling time varying features ofexchange rate returns maylead to improved hedge behaviour within currency overlay management. Classification-JEL: C11; C44; E47; G15 Keywords: Bayesian decision making; econometric modelling; exchange rates; risk management; stochastic volatility; GARCH File-Url: http://papers.tinbergen.nl/01017.pdf File-Format: application/pdf File-Size: 406731 bytes Handle: RePEc:tin:wpaper:20010017