Daily exchange rate behaviour and hedging of currency risk
Article first published online: 5 FEB 2001
Copyright © 2000 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Special Issue: Inference and Decision Making
Volume 15, Issue 6, pages 671–696, November/December 2000
How to Cite
Bos, C. S., Mahieu, R. J. and Van Dijk, H. K. (2000), Daily exchange rate behaviour and hedging of currency risk. J. Appl. Econ., 15: 671–696. doi: 10.1002/jae.577
- Issue published online: 5 FEB 2001
- Article first published online: 5 FEB 2001
- Manuscript Revised: 31 AUG 2000
- Manuscript Received: 30 SEP 1999
We construct models which enable a decision maker to analyse the implications of typical time series patterns of daily exchange rates for currency risk management. Our approach is Bayesian where extensive use is made of Markov chain Monte Carlo methods. The effects of several model characteristics (unit roots, GARCH, stochastic volatility, heavy-tailed disturbance densities) are investigated in relation to the hedging strategies. Consequently, we can make a distinction between statistical relevance of model specifications and the economic consequences from a risk management point of view. We compute payoffs and utilities from several alternative hedge strategies. The results indicate that modelling time-varying features of exchange rate returns may lead to improved hedge behaviour within currency overlay management. Copyright © 2000 John Wiley & Sons, Ltd.