Abstracts
Abstract
Globalization has been responsible for increasing exposure to risks related to currency factors for companies and countries. The literature has addressed the issue of currency volatility in emerging and developed countries without a consensus on such a dynamic and there are few studies that estimate and place the risk of the Brazilian real. Thus, this study aimed to measure the risk of the Brazilian exchange rate, as well as test the hypothesis that there is a significant difference in volatility between currencies of emerging and developing countries. Through the parametric VaR set to extreme values distributions, it was observed that the Brazilian real presented at greater risk of exchange rate. The results also showed that the distributional assumptions do not seem to have any specific pattern when faced emerging and developed countries and also emerging countries showed less volatility, reflecting the preponderance of factors external to the foreign exchange market in determining the risk of some currencies.
Keywords:
ValueatRisk; Exchange rate; Risk management; Developing and emerging countries
Resumo
A globalização tem sido responsável pela elevação da exposição de empresas e países a riscos relativos a fatores cambiais. A literatura tem abordado a questão da volatilidade da moeda em países emergentes e desenvolvidos sem um consenso sobre tal dinâmica, bem como são escassos os estudos que estimam e situam o risco do real brasileiro. Dessa forma, o presente estudo teve por objetivo mensurar o risco da taxa de câmbio brasileira, bem como testar a hipótese de que existe uma diferença significante na volatilidade entre moedas de países emergentes e em desenvolvimento. Por meio do VaR paramétrico ajustado para distribuições de valores extremos, observouse que o real brasileiro apresentou taxa de câmbio de maior risco. Os resultados também revelam que os pressupostos distribucionais não parecem apresentar nenhum padrão específico quando confrontados países emergentes e desenvolvidos, e também que países emergentes apresentaram menor volatilidade, denotando a preponderância de fatores externos ao mercado cambial na determinação do risco de algumas moedas.
Palavraschave:
ValueatRisk; Taxa de câmbio; Risk Management; Países desenvolvidos e emergentes
1 Introduction
The growth of the importance of risk management lies in the volatility of financial variables, among them, we can highlight the exchange rate, interest rate, capital market, and commodity prices. Factors such as the end of fixed exchange rates, interest rate swings, financial crises, and sudden changes in commodity prices contribute to the increase in market unpredictability ( Jorion, 1997 Jorion, P. (1997). Valueatrisk: a nova fonte de referência para o controle do risco de mercado. São Paulo: Bolsa de Mercadorias & Futuros. ).
The exchange rate risk can be defined according to Madura (1989) Madura, J. (1989). International Financial Management (2nd ed.). St. Paul, Minnesota: West Publishing Company. as the unexpected changes in the exchange rate, leading to direct losses (derived from unhedged exposure), or indirect in the cash flows ( Papaionnou, 2006 Papaionnou, M. G. (2006). Exchange rate risk measurement and management: issues and approaches for firms (IMF Working Paper, No. 255, 20 p.). Washington: International Monetary Fund. http://dx.doi.org/10.5089/9781451865158.001.
Washington...
).
Managing exchange rate risk is related to a company's decisions about its exposure to foreign currencies, according to Allayannis et al., (2001) Allayannis, G., Ihrig, J., & Weston, J. (2001). Exchange rate hedging: financials vs. operatonal strategies. American Economic Review Papers and Proceeding , 91(2), 391395. and to manage it, it is crucial to understand the types of risks that are associated with the rate such as: transaction risks (related to cash flow risk); translation risks relating to the balance sheet; and economic risks (related to the present value of the company). Thus, once such risks are understood, it is important to measure them in order to manage the risk related to the exchange rate ( Papaionnou, 2006 Papaionnou, M. G. (2006). Exchange rate risk measurement and management: issues and approaches for firms (IMF Working Paper, No. 255, 20 p.). Washington: International Monetary Fund. http://dx.doi.org/10.5089/9781451865158.001.
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).
After consecutive years of economic instability and increasing inflation, Brazil underwent a process of monetary and exchange rate reform in 1994, during which time the real plan was instituted, and since then the Brazilian real has become the official currency of Brazil ( Batista, 1996 Batista, P. N., Jr. (1996). O plano real à luz da experiência mexicana e argentina. Estudos Avançados, 10(28), 129197., http://dx.doi.org/10.1590/S010340141996000300007.
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). Thus, the real consists of a floating exchange rate regime (more specifically a dirty float), that is, a regime that allows the existence of appreciations and depreciation of the currency, leading to exchange rate volatility ( Lara, 2005 Lara, L. R. (2005). Regimes Cambiais Alternativos para o Caso Brasileiro (pp. 116). Curitiba: PETEconomia. Recuperado em 26 de maio de 2016, de http://www.peteconomia.ufpr.br/banco_de_arquivos/00013_RegimesCambiais.pdf
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). Volatility is a significant input parameter in the approach to options, both financial and real assets ( Oliveira & Pamplona, 2012 Oliveira, R. J., & Pamplona, E. O. (2012). A volatilidade de projetos industriais para uso em análise de risco de investimentos. Gestão & Produção , 19(2), 337345. http://dx.doi.org/10.1590/S0104530X2012000200008.
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).
According to Carvalho & Sicsú (2004) Carvalho, F. J. C. C., & Sicsú, J. (2004). Controvérsias recentes sobre controle de capitais. Revista de Economia Política, 24(2), 163184. , the high exchange rate volatility causes an increase in uncertainties, reducing the predictability of financial costs. In this way, it can be inferred that significant devaluations in the local currency can benefit exporting companies, while generating losses to those that present large amounts of debt in foreign currencies.
Thus, the risk of exchange rate fluctuations has a strong impact on the economy and the performance of exporting industries. It is important to know and measure the risk related to the value of the currency ( Akhtekhane & Mohammadi, 2012 Akhtekhane, S. S., & Mohammadi, P. (2012). Measuring exchange rate fluctuations risk using valueatrisk. Journal of Applied Finance & Banking, 2(3), 6579. ). In addition, the currency can be considered as a financial asset like any other, being subject to fluctuations of supply and demand, as well as speculative attacks.
Therefore, the above factors are highlighted and based on the analysis of the current economic situation in Brazil, in which, in 2014, the dollar increased 13% in relation to the real and the real continues to show strong volatility in the year 2015. From this it is important to measure the risk of this financial variable ( Federowski, 2015 Federowski, B. (2015). Dólar sobe 13% ante real em 2014, apesar de BC; pressão deve continuar em 2015. Recuperado em 25 de maio de 2016, de http://br.reuters.com/article/topNews/idBRKBN0K81GZ20141230
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). The Figure 1 shows the evolution of the real against the dollar.
Despite the plurality of articles that use VaR to measure the risk of different exchange rates, such as Zhan & Tian (2000) Zhan, Y. R., & Tian, H. W. (2000). The application of extreme value theory on computing valueatrisk of Exchange rates. Journal of System Engineering, 15, 4453. , Wang et al. (2010) Wang, Z., Wu, W., Chen, C., & Zhou, Y. (2010). The Exchange rate risk of chinese yuan: using AaR and ES based on extreme value theory. Journal of Applied Statistics , 37(2), 265282. http://dx.doi.org/10.1080/02664760902846114.
http://dx.doi.org/10.1080/0266476090284...
, Li et al. (2007) Li, S. P., Wang, H. L., & Li, D. (2007). External dependence model of foreign Exchange rate. Journal of System Engineering, 27, 8286. , among others, there are few studies that investigate the exchange rate risk of the brazilian real. Moreover, in the current scenario, in which the country has been facing several economic and political reforms in which the local currency has been showing strong volatility, the measurement of the risk of the real acquires a character of urgency, presenting, therefore, great importance.
Wang et al. (2010) Wang, Z., Wu, W., Chen, C., & Zhou, Y. (2010). The Exchange rate risk of chinese yuan: using AaR and ES based on extreme value theory. Journal of Applied Statistics , 37(2), 265282. http://dx.doi.org/10.1080/02664760902846114.
http://dx.doi.org/10.1080/0266476090284...
uses EVT (Extreme Value Theory) to estimate the tails of the yuan exchange rate returns, finding high adherence to the Pareto distribution. Although the VaR EVT underestimates the risk to the proposed exchange rate, such an approach still appears to be superior to the traditional VaR calculation, such as historical simulation and variancecovariance.
The lack of consensus on distributional assumptions and VaR computation methods becomes more pronounced when compared to distinct economic realities, such as assets of developed economies and assets of emerging economies.
In fact, Gençay & Selçuk (2004) Gençay, R., & Selçuk, F. (2004). Extreme value theory and ValueatRisk: relative performance in emerging markets. International Journal of Forecasting , 20(2), 287303. http://dx.doi.org/10.1016/j.ijforecast.2003.09.005.
http://dx.doi.org/10.1016/j.ijforecast....
still argue that developing economies are much more subject to change in the short term, and therefore, the probability distributions of their returns and estimated parameters are also likely to change with some frequency. In addition, developing markets are more subject to financial swings.
Kittiakarasakun & Tse (2011) Kittiakarasakun, J., & Tse, Y. (2011). Modeling the fat tails in Asian stock markets. International Review of Economics & Finance, 20(3), 430440. http://dx.doi.org/10.1016/j.iref.2010.11.013.
http://dx.doi.org/10.1016/j.iref.2010.1...
argue that financial models are often not applicable to emerging markets as well as developed markets, for example, G7. This could occur because, often, developing countries impose restrictions on the free flow of capital.
The difference in markets is reflected in the tails of probability distributions of returns, which especially for emerging markets, tend to be nonnormal. In fact, Longin (2005) Longin, F. (2005). The choice of the distribution of asset returns: How extreme value theory can help? Journal of Banking & Finance, 29(4), 10171035. http://dx.doi.org/10.1016/j.jbankfin.2004.08.011.
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argues that distribution tails are different in emerging markets.
However, Kittiakarasakun & Tse (2011) Kittiakarasakun, J., & Tse, Y. (2011). Modeling the fat tails in Asian stock markets. International Review of Economics & Finance, 20(3), 430440. http://dx.doi.org/10.1016/j.iref.2010.11.013.
http://dx.doi.org/10.1016/j.iref.2010.1...
also argue that the differences between Asian and US returns may be merely a matter of scale, since the occurrence of extreme events in Asia is as likely as in the United States, demonstrating that market tails chinese and the north american market are similar. This denotes that a risk management model would work well for both realities. This fact is verified, since the study conducted by the authors did not find significant differences in the risks measured by VaR.
Thus, risk measurement has been a major concern among managers and regulators, with ValueatRisk (VaR) being one of the most commonly used tools for risk measurement.
According to Jorion (1997) Jorion, P. (1997). Valueatrisk: a nova fonte de referência para o controle do risco de mercado. São Paulo: Bolsa de Mercadorias & Futuros. , VaR is a risk measurement method that uses standard statistical techniques, in other words, VaR measures the worst loss expected over a given time interval within a given confidence level.
Thus, it is observed that the VaR is an easytounderstand method capable of providing benefits such as the provision of management information, performance evaluation, as well as contributing to resource allocation decisions, thus constituting one of the most important tools for Risk management ( Jorion, 1997 Jorion, P. (1997). Valueatrisk: a nova fonte de referência para o controle do risco de mercado. São Paulo: Bolsa de Mercadorias & Futuros. ).
The literature about VaR is quite extensive and has important works such as Chela et al. (2011) Chela, J. L., Abrahão, J. C., & Kamogawa, L. F. O. (2011). Modelos ortogonais para estimativa multivariada de VaR (Value at Risk) para risco de mercado: um estudo de caso comparativo. Revista de Economia do Mackenzie, 9(1), 7092. , Gaglianone et al. (2008) Gaglianone, W. P., Lima, L. R., & Linton, O. (2008). Evaluating ValueatRisk models via quantile regressions. (Working Paper Series, No. 161, pp. 156). Recuperado em 25 de maio de 2016, de https://www.bcb.gov.br/pec/wps/ingl/wps161.pdf
https://www.bcb.gov.br/pec/wps/ingl/wps...
, Jorion (2007) Jorion, P. (2007). ValueatRisk: the new benchmark for managing financial risk (3rd ed.). New York: McGraw Hill. , Taylor (2005) Taylor, J. W. (2005). Generating volatility forecasts from Value at Risk estimates. Management Science, 51(5), 712725. http://dx.doi.org/10.1287/mnsc.1040.0355.
http://dx.doi.org/10.1287/mnsc.1040.035...
, Glasserman et al. (2000) Glasserman, P., Heidelberger, P., & Shahabuddin, P. (2000). Variance reduction techniques for estimating ValueatRisk. Management Science, 46(10), 13491364. http://dx.doi.org/10.1287/mnsc.46.10.1349.12274.
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, so that there are several ways to estimate VaR, among them, nonparametric methods (historical simulation), parametric (variance covariance method), simulation (Monte Carlo method), and conditional heteroscedasticity methods, in particular, the GARCH models ( Wang et al., 2010 Wang, Z., Wu, W., Chen, C., & Zhou, Y. (2010). The Exchange rate risk of chinese yuan: using AaR and ES based on extreme value theory. Journal of Applied Statistics , 37(2), 265282. http://dx.doi.org/10.1080/02664760902846114.
http://dx.doi.org/10.1080/0266476090284...
). Since the use of VaR is of interest in addition to companies and financial institutions, regulatory agencies have also been underestimating their importance so that, since 1988 with the Basle Accord, several regulatory initiatives involving VaR ( Jorion, 1997 Jorion, P. (1997). Valueatrisk: a nova fonte de referência para o controle do risco de mercado. São Paulo: Bolsa de Mercadorias & Futuros. ).
However, although there is no consensus on which probability distributions to use, and the weaknesses of parametric VaR under normality assumptions, parametric VaR is extremely interesting because of its simplicity of calculation and efficacy when correctly specifying the distribution of returns. And should therefore be abandoned as an alternative to the VaR computation ( Moralles et al., 2013 Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
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).
In view of the above, the main objective of this paper is to measure the risk of the Brazilian exchange rate, as well as to test the hypothesis that there is a significant difference in the volatility between currencies of emerging and developing countries, as stated by authors such as Kittiakarasakun & Tse (2011) Kittiakarasakun, J., & Tse, Y. (2011). Modeling the fat tails in Asian stock markets. International Review of Economics & Finance, 20(3), 430440. http://dx.doi.org/10.1016/j.iref.2010.11.013.
http://dx.doi.org/10.1016/j.iref.2010.1...
, Longin (2005) Longin, F. (2005). The choice of the distribution of asset returns: How extreme value theory can help? Journal of Banking & Finance, 29(4), 10171035. http://dx.doi.org/10.1016/j.jbankfin.2004.08.011.
http://dx.doi.org/10.1016/j.jbankfin.20...
and Gençay & Selçuk (2004) Gençay, R., & Selçuk, F. (2004). Extreme value theory and ValueatRisk: relative performance in emerging markets. International Journal of Forecasting , 20(2), 287303. http://dx.doi.org/10.1016/j.ijforecast.2003.09.005.
http://dx.doi.org/10.1016/j.ijforecast....
.
In view of the above, the main objective of this paper is to measure the risk of the Brazilian exchange rate, as well as to test the hypothesis that there is a significant difference in the volatility between currencies of emerging and developing countries, as stated by authors such as Kittiakarasakun & Tse (2011) Kittiakarasakun, J., & Tse, Y. (2011). Modeling the fat tails in Asian stock markets. International Review of Economics & Finance, 20(3), 430440. http://dx.doi.org/10.1016/j.iref.2010.11.013.
http://dx.doi.org/10.1016/j.iref.2010.1...
, Longin (2005) Longin, F. (2005). The choice of the distribution of asset returns: How extreme value theory can help? Journal of Banking & Finance, 29(4), 10171035. http://dx.doi.org/10.1016/j.jbankfin.2004.08.011.
http://dx.doi.org/10.1016/j.jbankfin.20...
and Gençay & Selçuk (2004) Gençay, R., & Selçuk, F. (2004). Extreme value theory and ValueatRisk: relative performance in emerging markets. International Journal of Forecasting , 20(2), 287303. http://dx.doi.org/10.1016/j.ijforecast.2003.09.005.
http://dx.doi.org/10.1016/j.ijforecast....
. Thus, the study will compare the risk of currencies from different countries, separated into two groups, emerging and developed. The first group consists of: real (BRL); Argentine peso (ARG); Chilean peso (CLP); New Peruvian sun (PEN); Mexican peso (MXN); Chinese yuan (CNY); Indian Rupee (INR); And, won South Korean (KRW). The second group consists of: Australian dollar (AUS); Euro (EUR); Swiss Franc (CHF); Pound sterling (GBP); And, Japanese Yen (JPY). Such sampling was chosen to compare the proposed VaR calculation method between developing markets, developed markets and the asian market. The risk assessment was performed using parametric VaR via the adherence test for extreme values, as presented in ( Moralles et al., 2013 Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
).
2 ValueatRisk
The problem of measuring and controlling financial risk has motivated researchers and decision makers to seek indicators capable of identifying how risky a decision is ( Ribeiro & Ferreira, 2005 Ribeiro, C. O., & Ferreira, L. A. S. (2005). Uma contribuição ao problema de composição de carteiras de mínimo valor em risco. Gestão & Produção, 12(2), 295304. http://dx.doi.org/10.1590/S0104530X2005000200012.
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).
ValueatRisk (VaR) is one of the most popular risk measurement tools used by the financial sector. It was created in the 1990s, shortly after the financial disasters such as that of Barings, cited above, and can be defined as the maximum expected loss of a portfolio, with a certain level of significance α (or confidence level 1α) in a given time horizon ( Moralles et al., 2013 Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
, Aragón et al., 2013 Aragón, C. S., Pamplona, E., & Vidal Medina, J. R. (2013). Identificação de investimentos em eficiência energética e sua avaliação de risco. Gestão & Produção, 20(3), 525536. http://dx.doi.org/10.1590/S0104530X2013000300003.
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). For example, if we have a daily VaR of R $ 1 million with a confidence level of 99%, there is only 1% chance of a loss being more than R $ 1 million on any business day.
In this way, the VaR provides an indication of the probability of a potential change in the value of a portfolio resulting from the change in market conditions over a given period of time by demonstrating how likely the VaR measure can be exceeded ( Crouhy et al., 2006 Crouhy, M., Galai, C., & Mark, R. (2006). The essentials of risk management (2nd ed.). Nova York: McGraw Hill. ).
Gaio & Pimenta (2012) Gaio, L. E., & Pimenta, T., Jr. (2012). ValueatRisk da Carteira do Ibovespa: uma análise com o uso de modelos de memória longa. Gestão & Produção , 19(04), 779792. http://dx.doi.org/10.1590/S0104530X2012000400009.
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point out that VaR is one of the most important market risk measurement tools and, undoubtedly, the one most used by institutions and risk managers. Estimating the maximum expected loss, within a period of time and a given level of confidence, one has the known market risk.
2.1 Exchange rate regimes
According to Zini (1996) Zini, A. A., Jr. (1996). Política cambial com liberdade ao câmbio. In R. Baumann (Org.). O Brasil e a Economia Global (pp. 109131). Rio de Janeiro: Campus/SOBEET. , the legal regime refers to the set of characteristics derived from norms, laws and practices that regulate transactions with foreign currencies in the economy. In economic terms, the exchange rate regime consists of the way a country's exchange rate is determined, that is, whether the exchange rate is fixed, fluctuating or assuming some variation between these two (intermediate regimes).
When a country adopts an exchange rate regime, it expects it to assist in economic stability, stimulate foreign trade and investment, provide conditions for fiscal and monetary policy management, and protect the domestic economy from disruptions arising from international finance ( Sambatti & Rissato, 2004 Sambatti, A. P., & Rissato, D. (2004). Uma discussão sobre a escolha de Regimes Cambiais no Brasil a partir do Plano Real. In Anais do III Seminário do Centro de Ciências Sociais Aplicadas. Cascavel: UNIOESTE. ).
In the fixed exchange regime, the nominal exchange rate is fixed and parity must be maintained through the intervention of the Central Bank in the foreign exchange market, buying or selling currency according to the adjustment needs of that market. If there is excess supply (demand) of foreign exchange, the Central Bank intervenes in the market by buying (selling) currencies at the fixed rate. Thus, the credibility of this system depends on the capacity of intervention of the Central Bank, via available international reserves ( Zini, 1996 Zini, A. A., Jr. (1996). Política cambial com liberdade ao câmbio. In R. Baumann (Org.). O Brasil e a Economia Global (pp. 109131). Rio de Janeiro: Campus/SOBEET. ).
Like this, the fixed exchange rate regime tends to provide more stable horizons to the exchange rate, since it assists in the stability of prices and expectations, serving as a reference in the decisionmaking of the agents and thus allowing the increase of trade and Investments. Thus, by fixing the exchange rate, the risk of uncertainties caused by high exchange rate variability tends to be eliminated ( Frankel, 1999 Frankel, J. (1999). No single currency regime is right for all countries or at all times (NBER Working Paper, No. 7338). Cambridge: National Bureau of Economic Research. ).
The pure floating exchange rate regime is one in which the Central Bank does not intervene in the foreign exchange market. The exchange rate is determined by the supply and demand of foreign currency. In this way, the Central Bank is free to maintain high levels of international reserves ( Zini, 1996 Zini, A. A., Jr. (1996). Política cambial com liberdade ao câmbio. In R. Baumann (Org.). O Brasil e a Economia Global (pp. 109131). Rio de Janeiro: Campus/SOBEET. ; Corden, 2001 Corden, W. M. (2001). Regimes e políticas cambiais: uma visão geral. Revista de Economia Política, 21(3), 83. ). However, the configuration of this regime is more evident in theory than in practice, since, normally, what is verified is some degree of exchange monitoring in the form of direct intervention in the exchange market, by the Central Bank, in order to avoid movements of high volatility, in the short run, which may compromise certain economic policy objectives, in practice, a regime of managed fluctuation known as dirty flotation. In this case, the Central Bank does not advocate a specific exchange rate, but it intervenes in the exchange market ( Corden, 2001 Corden, W. M. (2001). Regimes e políticas cambiais: uma visão geral. Revista de Economia Política, 21(3), 83. ).
As a result of the great exchange rate volatility observed after 1973, along with the difficulties encountered in maintaining monetary stability in a context of financial liberalization, especially in the 1980s, discussions on exchange rate regimes, according to Edwards & Savastano (1999) Edwards, S., & Savastano, M. A. (1999). Exchange rates in emerging economies: what do we know? What do we need to Know? (NBER Working Paper, No. 7228, 74 p.). Cambridge: National Bureau of Economic Research. started to incorporate the intermediate regimes, standing out among them: the one of exchange bands; the floating flotation, the crawling peg; the fixed but adjustable exchange rate; the currency board and the full dollarization. Each of these regimes has characteristics that bring them closer to one or the other of the canonical regimes.
2.2 Convertibility
As a natural consequence of acceptability at the international level, one has the characteristic of currency convertibility. The currencies, under the exchange rate aspect, are classified as: convertibles; and, inconvertible.
Convertible currencies are those that are freely accepted by other countries, without any restriction and in any market, known as Strong Currency. Nonconversible currencies are those that do not have an easy international course or that are not accepted by other countries in foreign exchange transactions. Chart 1 shows the main examples of convertible and inconvertible currencies.
2.1 Foreign exchange risk
The fixed exchange rate regime was widely used until the mid1980, however, with improved markets, high capital mobility, this type of regime was losing strength and fans, and today most countries use floating exchange rate regimes ( Lara, 2005 Lara, L. R. (2005). Regimes Cambiais Alternativos para o Caso Brasileiro (pp. 116). Curitiba: PETEconomia. Recuperado em 26 de maio de 2016, de http://www.peteconomia.ufpr.br/banco_de_arquivos/00013_RegimesCambiais.pdf
http://www.peteconomia.ufpr.br/banco_d...
).
The fixed exchange regime is a system in which the Central Bank of a country establishes a fixed value for the parity between the local currency and the dollar.
The floating exchange rate regime allows the currency to appreciate and depreciate, which causes exchange rate volatility ( Lara, 2005 Lara, L. R. (2005). Regimes Cambiais Alternativos para o Caso Brasileiro (pp. 116). Curitiba: PETEconomia. Recuperado em 26 de maio de 2016, de http://www.peteconomia.ufpr.br/banco_de_arquivos/00013_RegimesCambiais.pdf
http://www.peteconomia.ufpr.br/banco_d...
). This type of scheme was introduced for the first time in 1973, and since its introduction, the exchange rates of several currencies have a much more volatile behavior than the factors governing their behavior, such as domestic and international money supply, Prices, and the international balance of payments ( Lintz, 2004 Lintz, A. C. (2004). Dinâmica de bolhas especulativas e finanças comportamentais: um estudo de caso aplicado ao mercado de câmbio brasileiro (Tese de doutorado). Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo, São Paulo. ). This feature emphasizes the importance of understanding these fluctuations and managing the risk of this financial variable.
The exchange rate concept consists of the reference value of a currency in relation to a second currency. Therefore, an increase in the exchange rate means the devaluation of the currency in question against the reference. The opposite is true.
According to Madura (1989) Madura, J. (1989). International Financial Management (2nd ed.). St. Paul, Minnesota: West Publishing Company. exchange rate risk is related to the effects of unpredicted exchange rate changes on contracts involving more than one currency, that is, their recurring obligations and rights.
According to Jorion (1997) Jorion, P. (1997). Valueatrisk: a nova fonte de referência para o controle do risco de mercado. São Paulo: Bolsa de Mercadorias & Futuros. the VaR can be used to determine the exposure of financial risks such as the exposure to currencies, that is, exchange rate risk.
For such, one can use the three methods described above, and their returns are calculated from the difference between the daily quotation of one currency against the other, and the dollar is used for the most part as a reference ( Papaionnou, 2006 Papaionnou, M. G. (2006). Exchange rate risk measurement and management: issues and approaches for firms (IMF Working Paper, No. 255, 20 p.). Washington: International Monetary Fund. http://dx.doi.org/10.5089/9781451865158.001.
Washington...
).
For example, papers such as Papaionnou (2006) Papaionnou, M. G. (2006). Exchange rate risk measurement and management: issues and approaches for firms (IMF Working Paper, No. 255, 20 p.). Washington: International Monetary Fund. http://dx.doi.org/10.5089/9781451865158.001.
Washington...
calculate the exchange rate risk for companies. Wang et al. (2010) Wang, Z., Wu, W., Chen, C., & Zhou, Y. (2010). The Exchange rate risk of chinese yuan: using AaR and ES based on extreme value theory. Journal of Applied Statistics , 37(2), 265282. http://dx.doi.org/10.1080/02664760902846114.
http://dx.doi.org/10.1080/0266476090284...
estimates the risk of the Chinese yuan through the use of VaR based on extreme value. The work of Zhan & Tian (2000) Zhan, Y. R., & Tian, H. W. (2000). The application of extreme value theory on computing valueatrisk of Exchange rates. Journal of System Engineering, 15, 4453. measures the risk in the Japanese yen. While Li et al. (2007) Li, S. P., Wang, H. L., & Li, D. (2007). External dependence model of foreign Exchange rate. Journal of System Engineering, 27, 8286. propose a model to estimate the VaR of a portfolio of Canadian dollars and Japanese Yen. Akhtekhane & Mohammadi (2012) Akhtekhane, S. S., & Mohammadi, P. (2012). Measuring exchange rate fluctuations risk using valueatrisk. Journal of Applied Finance & Banking, 2(3), 6579. calculate the RialEuro VaR using the parametric method and the historical (nonparametric) simulation method. It is possible to find other articles and researches that approach the theme.
2.2 Volatility between currencies of emerging and developing countries
The First World represents developed countries, with great potential in the industrial area, in structured policy and high Human Development Index, such as: Norway, United States, Sweden, Japan, Germany, France, and Italy.
No rules are defined regarding the classification of developed, emerging and underdeveloped countries. It is based on market statistics. Those located in the central area of Asia, according to the United Nations, do not fall under any of these classifications. They are: Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan and Turkmenistan. Nor is Mongolia in the class. These countries are in another category, that of countries in transition. However, they are related in conjunction with developmental ones.
It is worth mentioning the G7 or Group of Seven that it is a forum composed of seven nations that together represent half the world economy. It is comprised of Germany, Canada, the United States, France, Italy, Japan and the United Kingdom.
The exchange rate represents an important element to be considered for the growth trajectory in developed and emerging nations, underlining the effects of the exchange rate volatility of exchange rate regimes in inflationary contexts on the growth of the latter ( Araújo, 2009 Araújo, E. (2009). Volatilidade cambial e crescimento econômico em economias em desenvolvimento e emergentes. In Anais do II Encontro Internacional da Associação Keynesiana Brasileira (pp. 119). Porto Alegre: Universidade Federal do Rio Grande do Sul. Recuperado em 26 de maio de 2016, de http://www.ppge.ufrgs.br/akb/encontros/2009/39.pdf
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). The Chart 2 represents some authors who studied the real exchange rate and economic performance.
The implied volatility of developed country currencies outperformed emerging markets for the first time in a year. Growing doubt about central banks' ability to generate growth and inflation in Japan and Europe and the optimism that emerging countries will avoid a generalized economic slowdown have affected exchange rate patterns ( África21, 2016 África21. (2016). Volatilidade de moedas deixa países emergentes e afeta desenvolvidos. Recuperado em 26 de maio de 2016, de http://www.africa21online.com/artigo.php?a=20772&e=Economia
http://www.africa21online.com/artigo.ph...
).
Currency gains due to weakening dollar are not welcome in developed countries struggling to boost economic growth, but on the other hand are well received by central banks of emerging market countries, which fight capital outflows and Depreciations. The outlook for emerging markets has also improved since concerns about China's growth slowed, and the recovery in commodity prices boosted revenues for producers such as South Africa or Brazil ( África21, 2016 África21. (2016). Volatilidade de moedas deixa países emergentes e afeta desenvolvidos. Recuperado em 26 de maio de 2016, de http://www.africa21online.com/artigo.php?a=20772&e=Economia
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), as China adopts a fixed exchange rate in relation to the US dollar and, like Russia, uses the currency anchor.
3 Research method
The present research has interests focused mainly on the measurement of risk in the local currency (real) to compare it with other currencies, in order to position the volatility of the real against other currencies, as well as verify the hypothesis that developing economies have More volatile currencies. This work starts from the calculation of the parametric VaR adjusted for different theoretical probability distributions according to the KolmogorovSmirnov and AndersonDarling adhesion tests for the extreme values of Moralles et al. (2013) Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
.
The US dollar (USD) was the currency selected as the reference currency, since it is the currency most used in international transactions, as well as being used as an international reserve worldwide. Given the above, the historical series of the Brazilian real (BRL) and other twelve currencies were collected, based on their value against the dollar. Sampling will be divided into two groups: emerging and developed countries. The first group consists of: Argentine peso (ARG); Chilean peso (CLP); New Peruvian sun (PEN); Mexican peso (MXN); Chinese yuan (CNY); Indian Rupee (INR); And, won South Korean (KRW). The second group consists of: Australian dollar (AUS); Euro (EUR); Swiss Franc (CHF); Pound sterling (GBP); And, Japanese Yen (JPY). Such sampling was chosen to compare the proposed VaR calculation method between developing markets, developed markets and the Asian market.
For the accomplishment of the experiment, the daily quotation of the currencies shown in Chart 3 and the quotation of the brazilian currency between the years of 2008 and november 9, 2015 through the website of the Central Bank of Brazil were collected. The choice of this time horizon seeks to encompass the period of financial crises beginning in 2008 and the current volatility of the brazilian currency.
Then, from the daily closing value of each currency against the Real, the daily returns were calculated through Equation 1 .
In that Rt corresponds to the daily return, ln rt represents the value of the asset on day t and, ln rt1 corresponds to the value on day t1. For all distributions that do not admit negative values, Equation 1 was calculated in logarithmic terms in order to maintain percentage proportionality, but using terms in positive values ( Moralles et al., 2013 Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
), as shown in Equation 2 .
Rp are the returns expressed in exponential terms from the returns Rt obtained in Equation 2 . Once this has been done, the accumulated empirical probability distribution of the various currencies will be assembled, representing their return. In order to better parameterize the empirical distribution, as well as to capture the extreme values of the left tail, and consequently to obtain a VaR that best represents reality, the extreme value theory (EVT) will be applied, reducing the importance of the central values and the right tail. It is better to predict the movements related to the extreme values that consist of the method developed by Moralles et al. (2013) Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
.
In this way, a second series will be constructed for each coin, and this new series will be composed by the 10% lower returns found during the studied period. Thus, this work aims to apply extreme value theory (EVT) in order not to overestimate or underestimate risk exposure. Being that, when working with the extreme values, a probabilistic distribution is obtained that better adheres to the left tail, which will result in a more realistic VaR.
Subsequently, these distributions will be compared with other theoretical distributions. Then, the KolmogorovSmirnov adhesion test and the AndersonDarling adhesion test will be used, which will indicate the degree of agreement between the sample distribution and the theoretical distribution ( Moralles et al., 2013 Moralles, H. F., Rebelatto, D. A. N., & Sartoris, A. (2013). Parametric VaR with goodnessoffit based on EDF statistics for extreme returns. Mathematical and Computer Modelling , 58(910), 16481658. http://dx.doi.org/10.1016/j.mcm.2013.07.002.
http://dx.doi.org/10.1016/j.mcm.2013.07...
). The KolmogorovSmirnov and AndersonDarling adhesion test was performed from a routine developed by EasyFit 5.6.
Thus, the distribution to be used in the VaR calculation will be based on ( Equation 3 ).
If
$KS\le {K}_{1\alpha}$ , which ${K}_{1\alpha}$ are values critical to a significance $\alpha $ .
And,
Additionally, ${\phi}_{i}$ it is specified by (4),
Which, ${\phi}_{i}$ is a given probability distribution
Which, ${A}_{1\alpha}^{}$ are values to a significance $\alpha $ for a distribution ${\phi}_{i}$ .
Once the distributions that best represent the series were obtained, the calculation of the daily VaR, obtained from the same software, was performed at a significance level of 50% for the composite series of the 10% lower values, in order to obtain a Level of significance of 5% for the whole series.
In these terms, the model presented for the VaR calculation will be ( Equation 5 ).
Which,
p is the level of significance used for the VaR calculation.
$\mu ,\sigma ,\xi $ are respectively parameters of mean, standard deviation, and distribution format ${\phi}_{i}$ using iterative numerical methods.
${\phi}_{i}^{1}(x)$ is the inverse cumulative density function of the probability distribution to be specified by the goodnessoffit tests.
Finally, to validate the VaR calculation method, backtesting was performed ( Kupiec, 1995) Kupiec, P. H. (1995). Techniques for verifying the accuracy of risk management models. Journal of Derivatives, 3(2), 7384. http://dx.doi.org/10.3905/jod.1995.407942.
http://dx.doi.org/10.3905/jod.1995.4079...
, which calculates the interval for VaR acceptance given by the likelihood ratio of a Bernoulli distribution of ( Equation 6 ).
Whose interval limit is given by ( Equation 7 ),
Thus, the inerval created by the Kupiec test allows one to evaluate if the estimated VaR is under control, that it, to verify if it is not underestimated or overestimated.
4 Results
Regarding the evolution of the Brazilian real against the dollar at the end of each month between january 2008 and november 2015, it is stated that the currency suffered a strong devaluation in the recent period, with the Real depreciating by 49.4% In the last 12 months, reaching its maximum price of R$ 4.21 during the study period on September 29, 2015. Moreover, the currency was very volatile between 2008 and 2009. It is important to note that both in 2008 and 2009 Brazil has experienced economic crises, and today the country is experiencing a strong economic recession, which justifies the volatility presented by the currency during the periods highlighted.
In the graphs shown in Figure 2 , prices are shown at the end of each month in each of the Latin American countries  Argentina, Chile, Mexico and Peru. Figure 3 shows the same observation for the currencies of the European Union, Switzerland, the United Kingdom and Australia. Finally, in Figure 4 , it is possible to observe the behavior of the currencies of Japan, South Korea, China and India.
Evolution of the exchange rate of Latin American countries. Source: Prepared by the authors (2016).
Evolution of the exchange rate currencies of the European Union, Switzerland, the United Kingdom and Australia. Source: Prepared by the authors (2016).
Evolution of the exchange rate of the currencies of Japan, South Korea, China and India. Source: Prepared by the authors (2016).
Note that for the great majority of currencies there were more pronounced fluctuations during periods of crisis, especially in the second half of 2008 and beginning of 2009, when volatility spikes are more pronounced. It is also possible to observe that, for more recent dates, the graphs show a greater volatility when compared to previous periods, although it is less marked than that between 2008 and 2009.
In view of this volatility presented in all currencies studied, it is possible to emphasize again the need and importance in measuring and knowing the risks involved in exchange rates.
Once the returns for each coin were obtained, the adhesion test was performed for the lowest 10% values of each distribution, in order to obtain the probability distribution that best portrayed the left tail of each series.
The results obtained by the adhesion test performed by the software EasyFit 5.6 are shown in Charts 4 and 5 .
The Chart 4 shows that different distributions for the same series, with the exception of the Chilean peso, of the Canadian dollar and the Indian rupee were obtained for the different test types, in which both tests resulted in the adherence of one Same distribution  General Extreme Value (GEV). Moreover, it is notorious that coins of the same group exhibited relatively similar behavior. As the similarities are more recurrent in the comparison between currencies of the same group, than when comparing currencies of different groups.
The Chart 5 shows that the probability distribution that best describes the series of returns of different exchange rates for the KolmogorovSmirnov test consists of the general extreme value distribution (GEV), appearing ten times, whereas for The AndersonDarling test, both GEV functions and power function appeared 3 times.
From the distributions obtained as well as the parameters of each distribution, it was possible to calculate the VaR of the real and other currencies.
The average daily VaR of the real equals 1.45%, ie on a business day, there is only 5% probability of the actual loss being greater than 1.45%. Mean VaR was obtained by averaging the VaR calculated by the KolmogorovSmirnov test and the AndersonDarling test. The results obtained can be seen in Chart 6 .
Before analyzing the observed results, the backtesting was performed, in order to verify if the method proposed for the VaR calculation presented acceptable VaR values. The results obtained in the backtesting step can be observed in Chart 7 . It can be observed that the proposed method presented acceptable results, within the confidence interval. There was only one observation outside the acceptable region, which consisted of the VaR calculated by AndersonDarling for the South Korean Won. That is, in general, the proposed method  calculation of the VaR by the parametric method through the test of adherence to extreme values  points VaR values that do not overestimate or underestimate the risk.
The Chart 8 shows the results in descending order in absolute terms for each type of test, while Chart 9 shows the mean VaR values in descending order.
From the previous charts, it is observed that the Real presents the highest risk among all currencies studied, with only the Australian dollar surpassing the risk of the Real in the KolmogorovSmirnov test. In addition, it is possible to note that the currencies of the emerging countries have the lowest risk, with an average VaR of 0.78% and a median of 0.78%.
However, the low value of the group's average VaR can be explained by the fact that the Argentine currency presents a very small risk, with a VaR of 0.16%, which can be justified by the presence of an interventionist government that Does not allow the currency to float freely in the market. This fact can also be observed in Figure 2 , where it is noticed that, although the currency has devalued over time, it consisted of a regular and constant devaluation. By including the Real in the average of the emerging group, the VaR rises to 0.78% ( Chart 10 ).
In absolute terms, the developed group had an average VaR equal to 1.15%, 37% above the VaR of the emergent group. It is worth noting that the low risk observed in the Chinese currency is due to the presence of a strong and interventionist government that, together with the high international reserves, controls the exchange rate variation of the currency according to its internal policies. Thus, group 2 (developed) showed to be the group with a riskier exchange rate. As can be seen in Chart 10 .
Given the above, it can be inferred that the Brazilian currency presents a divergent behavior of the currencies studied. Its risk was closer to the Australian dollar, whose VaR is 1.22% lower than the Real VaR ( Chart 11 ). The high risk presented by the Brazilian currency can be explained by the current political and economic crisis that the country is going through, being a crisis almost exclusive of the country, so the volatility of the period is much higher than the others, which increases its risk.
The similarity between the VaR observed between some currencies, as in the case of european currencies, may be related to the fact that the exchange rates are exposed to the same risk factors, which can be explained by similar economies, crosspolitics and the same geographic region. Finally, it is possible to infer that the Brazilian real (BRL) is the currency with the highest risk of the dollar among the portfolio of currencies studied, while the Australian dollar (AUS) is the one that presents a risk similar to the Brazilian currency. The Argentine peso (ARG) proved to be the least risky currency in the period studied, followed by the Chinese yuan (CNY). It was also possible to observe that there was a relative similarity in the behavior among the currencies of the same group, and the group formed by the developed countries was the one that presented the highest risk among the other groups, contradicting the expectation that developed countries have more stable currencies Than those of developing countries.
5 Conclusions
The exchange rate is a fundamental variable in the process of economic development. Being that it composes one of the pillars of the Brazilian economy. Given its importance, the focus of this paper was to understand the volatility of the Brazilian currency in comparison with currencies of other countries, in order to establish a relationship between them by calculating ValueatRisk (VaR).
The currencies studied were divided into two groups: currencies of emerging countries; and, currencies of developed countries. The first group consisted of: real (BRL); Argentine peso (ARG); Chilean peso (CLP); New Peruvian sun (PEN); Mexican peso (MXN); Chinese yuan (CNY); Indian Rupee (INR); and, won South Korean (KRW). The second group consisted of: Australian dollar (AUS); Euro (EUR); Swiss Franc (CHF); Pound sterling (GBP); And, Japanese Yen (JPY). Such sampling was chosen to compare the proposed VaR calculation method between developing markets, developed markets and the Asian market.
It should also be noted that the currencies of the developed countries are convertible currencies, that is, they are freely accepted by other countries, without any restriction and in any market, since the currencies of the emerging countries are inconversible currencies, that is, they are Those currencies that do not have an easy international course or that are not accepted by other countries in foreign exchange transactions. Thus, this aspect was also considered as a parameter of classification of the two groups.
For this, the VaR of each coin was calculated by the parametric method by applying the extreme value theory (EVT) in order to best represent the extreme values, and the KolmogorovSmirnov and AndersonDarling adhesion tests were performed to reflect more accurately the actual historical distribution, resulting in a calculation method that proved to be effective, since the results obtained were within the confidence interval proposed by the backtesting, except for one sample. From this, it was possible to conclude that the average daily VaR of the real against the US dollar was 1,45%, a risk 65% higher than the average values obtained for the other twelve currencies studied. That is, the obtained VaR implies that there is only 5% probability in the real to incur a loss above 1,45% on a business day.
It was also observed that group 1 (emergent) had an average VaR of 0.78%, consisting of the lowest risk group, that is, the currencies of emerging countries presented a lower risk in relation to the US dollar among the groups studied. It is important to note that the argentine peso was the one that resulted in the lowest VaR equal to 0.16%, being, therefore, the less risky currency. Group 2 (developed) presented an average VaR of 1.15% and proved to be the group with the most risky exchange rates.
It is worth mentioning that in the period studied Argentina was in fact not very connected to international markets, which may explain the resistance of the peso to external shocks  that is, it is not only the degree of intervention that explains the paradoxical result of the performance of the argentine peso. The results showed that economies in similar stages and near maturity levels show a similar exchange rate behavior, so the results obtained for currencies of the same group were within the same range of values. The results showed that the Argentine peso (ARG) was the least risky currency in the period studied, followed by the Chinese yuan (CNY), the new Peruvian sol (PEN) and the Indian rupee (INR).
Thus, the findings of the present study are in agreement with the one found by Schnabl (2007) Schnabl, G. (2007). Exchange rate volatility and growth in small open economies at the Meu periphery (European Central Bank Working Papers, No. 773, 47 p.). Frankfurt: European Central Bank. , which verifies an inverse relationship and between exchange rate volatility and economic growth in developing countries with financial openness. Also, the results presented contradict Damiani (2008) Damiani, D. N. (2008). Os efeitos da taxa de câmbio no crescimento econômico: uma comparação entre países emergentes e países desenvolvidos (Dissertação de mestrado). Setor de Ciências Sociais Aplicadas, Departamento de Ciências Econômicas, Universidade Federal do Paraná, Curitiba. , which states that emerging countries are more vulnerable to exchange rate volatility, since the calculated VaR lower are in the fashions of emerging nations. And, following the same reasoning, the findings of the present study contradict Araújo (2009) Araújo, E. (2009). Volatilidade cambial e crescimento econômico em economias em desenvolvimento e emergentes. In Anais do II Encontro Internacional da Associação Keynesiana Brasileira (pp. 119). Porto Alegre: Universidade Federal do Rio Grande do Sul. Recuperado em 26 de maio de 2016, de http://www.ppge.ufrgs.br/akb/encontros/2009/39.pdf
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, which states that exchange rate volatility has a negative and significant effect on economic growth.
Therefore, in general terms, the volatility of currencies and their relation to development seem to be much more related to the level of government intervention on the value of currencies than with market factors described above. Thus, a mode with totally fluctuating change, although more volatile, points to the efficiency of the regulatory mechanisms of an exchange with low intervention. Regarding the predictability of the VaR methods, Kittiakarasakun & Tse (2011) Kittiakarasakun, J., & Tse, Y. (2011). Modeling the fat tails in Asian stock markets. International Review of Economics & Finance, 20(3), 430440. http://dx.doi.org/10.1016/j.iref.2010.11.013.
http://dx.doi.org/10.1016/j.iref.2010.1...
and Gençay & Selçuk (2004) Gençay, R., & Selçuk, F. (2004). Extreme value theory and ValueatRisk: relative performance in emerging markets. International Journal of Forecasting , 20(2), 287303. http://dx.doi.org/10.1016/j.ijforecast.2003.09.005.
http://dx.doi.org/10.1016/j.ijforecast....
argue that financial models are often not applicable to both emerging and developed markets, as well as the difference in markets reflected in the tails of probability distributions of returns. However, the results presented show a high incidence of generalized extreme value distribution (VEG) by the KolmogorovSmirnov test; And a pattern indistinct by the AndersonDarling test. Like this, in terms of VaR computation, distributional assumptions do not seem to have any specific pattern when confronted with emerging and developed countries, so it is not possible to say that developing country currencies are actually more volatile.

Financial support: None.
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Publication Dates

Publication in this collection
18 June 2018 
Date of issue
JulSep 2018
History

Received
03 June 2016 
Accepted
28 Dec 2016