Value at risk using financial copulas: Application to the Mexican exchange rate (2002-2011)

Abstract

Nowadays, the volatility of exchange rate is a crucial and a transcendental issue for all transactions, negotiations and operations taking place in foreign currency, being an objective and an accurate prediction the cornerstone. Therefore, the main objective of this research is to analyze whether the Mexican exchange rate market, risk assessment using traditional VaR and VaR with copulas methodologies are more accurate when the estimates are made for a wide historical time-series or two periods for certain, helping it to predict the maximum losses that may be, with the main motivation to have a efficient hedging strategy. The principal conclusion is that assessing risk with these methodologies, the series does not necessarily have to include more than five years, considering that the use of copulas as a dependent measure make that the prediction fits better to the movements of the real returns.