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on Risk Management |
| By: | Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Walid, BEN OMRANE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Erick, Rengifo |
| Abstract: | We design and implement optimal foreign exchange portfolio allocations. An optimal allocation maximizes the expected return subject to a Value-at-Risk (VaR) constraint. Based on intradaily data, the optimization procedure is carried out at regular time intervals. For the estimation of the conditional variance from which the VaR is computed, we use univariate and multivariate GARCH models. The result for each model is given by the best intradaily investment recommendations in terms of the optimal weights of the currencies in the risk portfolio. |
| Keywords: | Optimal portfolio selection; Value-at-risk; GARCH models; Foreign exchange markets |
| JEL: | C32 C53 G11 |
| Date: | 2006–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006005&r=rmg |
| By: | Akram, Q. Farooq (The Central Bank of Norway); Rime, Dagfinn (The Central Bank of Norway); Sarno, Lucio (University of Warwick and CEPR) |
| Abstract: | This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the frequency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analys is unveils the existence of numerous short-lived arbitrage opportunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit deviations from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency. |
| Keywords: | Exchange rates; arbitrage; foreign exchange microstructure |
| JEL: | F31 F41 G14 G15 |
| Date: | 2006–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0042&r=rmg |