Modelling Foreign Exchange Risk in a Managed Float Regime: Evidence from Pakistan

Jamshed Y. Uppal, Syeda Rabab Mudakkar

Abstract


We study the implications of the exchange rate regimes
(managed vs. floating) for implementing risk assessment models using
Pakistan data; the country seems to manage its currency mainly against
the US dollar, but to a lesser extent against other hard currencies. We
test five variations of the Value-at-Risk (VaR) model, including models
based on the Extreme Value Theory (EVT). Our results indicate that these
models do not perform as well for the currency pairs with the managed
float (USD/PKR and JPY/PKR). It implies that the managed float regime
imposes additional risk and cost on economic agents. The findings of
this paper provide additional support for following a free float policy,
and underscore the importance of the role the exchange rate regime plays
in facilitating management of risk by economic agents. Keywords: Value
at Risk, Risk Management, Managed Float, Extreme Value
Theory.

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DOI: https://doi.org/10.30541/v60i1pp.65-84

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