The Empirical Study In Measurement Of Exchange Rate Risk In China Commercial Banks

Since the July2005, China began to implement a managed float exchange rate regime,with reference to a basket of currencies. From then on, the exchange rate has become moreand more flexible and frequently day by day, which raise new and high requirements forour commercial banks in exchange rate risk management which we have not founded yet.Besides, a series of financial crisis have happened recent years which have caused badinfluences on our commercial banks operation. Consequently, our commercial banks hasbeen exposed to the exchange rate risk. To have a good management of the foreignexchange rate risk,we need to measure the risk accurately. As a result, a pressing matter ofthe moment is that the commercial banks need to identify and measure the exchange raterisk effectively.Based on the present situation of our commercial banks risk measure, we put lots ofefforts into the study of the main method of measuring the foreign rate risk-VaR(Value atRisk) which is popular in the western countries. Considering the necessity and applicabilityof the VaR method we introduced from the west, as well as the conditionalheteroskedasticity of the financial asset returns time series, we applied VaR-GARCHfamily model on the combination of the empirical and the theoretical study. The resultshowed that the optimal measurement method of USD/RMB exchange rate risk wasGARCH(1,1)-M model on the GED-distribution; The optimal measurement method ofEUR/RMB exchange rate risk was EGARCH(1,1) model on t-distribution; The optimalmeasurement method of HK/RMB exchange rate risk was PARCH(1,1) model ont-distribution; The optimal measurement method of JPY/RMB exchange rate risk wasEGARCH(1,1) model on t-distribution; The optimal measurement method of GBP/RMBexchange rate risk was TARCH(1,1) model on t-distribution. All the models can predict accurately. Lastly we made some conclusions and give some suggestions to the applicationof the VaR methods.