Skip to main content
SpringerLink
Log in

Forecasting Value at Risk of Foreign Exchange Rate by Integrating Geometric Brownian Motion

  • Conference paper
  • First Online:
Soft Computing in Data Science (SCDS 2018)

Part of the book series: Communications in Computer and Information Science ((CCIS,volume 937))

Included in the following conference series:

  • 711 Accesses

Abstract

Foreign exchange is one of the most important financial assets for all countries around the world including Malaysia. After recovering from the Asian financial crisis, Malaysia tried to build a strong currency in order to maintain the economic performance. The study focuses on Malaysia foreign exchange rate and foreign exchange risk between ten currencies, which are CNY, SGD, JPY, EUR, USD, THB, KRW, IDR, TWD and AUD. Unpredictability of the foreign exchange rate makes the traders hard to forecast the future rate and the future risk. The study implements the parametric approach in the Value at Risk (VaR) method and the geometric Brownian motion (GBM) model. The objectives of the study are to integrate the VaR model with the GBM model in order to compute or forecast the VaR. By using parametric approach, the study successfully computes the VaR of foreign exchange rate for different confidence levels. The GBM model is suitable to forecast the foreign exchange rate accurately using less than one year input data and using the log volatility formula. Lastly, the study verifies the feasibility of the integrated model for a one month holding period using the data shifting technique. In conclusion, the prediction of future foreign exchange rate and foreign exchange risk is important in order to know the performance of a country and to make better decision on investment.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  1. Pesenti, P.A., Tille, C.: The economics of currency crises and contagion: an introduction. Econ. Policy Rev. 6(3), 3–16 (2000)

    Google Scholar 

  2. Gotthelf, P.: Currency Trading: How to Access and Trade the World’s Biggest Market. Wiley, Mississauga (2003)

    Google Scholar 

  3. Department of Statistics Malaysia Homepage. http://www.statistics.gov.my/main/main.php. Accessed 28 Aug 2014

  4. Jorion, P.: Value at Risk: The New Benchmark for Managing Financial Risk, 2nd edn. McGraw-Hill International Edition, New York City (2002)

    Google Scholar 

  5. Duda, M., Schmidt, H.: Evaluation of various approaches to Value at Risk: empirical check. Master thesis, Lund University, Sweden (2009)

    Google Scholar 

  6. Engle, R.F., Manganelli, S.: CAViaR: Conditional autoregressive Value at Risk by regression quartiles. J. Bus. Econ. Stat. 22(4), 367–381 (2004)

    Article  Google Scholar 

  7. Aniūnas, P., Nedzveckas, J., Krušinskas, R.: Variance-covariance risk value model for currency market. Eng. Econ.: Econ. Eng. Decis. 1(61), 18–27 (2009)

    Google Scholar 

  8. Wilmott, P.: Introduces Quantitative Finance, 2nd edn. Wiley, Chichester (2007)

    MATH  Google Scholar 

  9. Abdul Hafiz, Z., Maheran, M.J.: Forecasting value at risk of unit trust portfolio by adapting geometric Brownian motion. Jurnal Kalam. Jurnal Karya Asli Lorekan Ahli Matematik 9(2), 24–36 (2016)

    Google Scholar 

  10. Aslinda, A.: Estimating Value at Risk of stock exchange and unit trust by using variance covariance method. Master thesis of M.Sc. (Applied Mathematics). Universiti Teknologi MARA, Malaysia (2018)

    Google Scholar 

  11. Siti Nazifah, Z.A., Maheran, M.J.: Forecasting share prices of small size companies in Bursa Malaysia using geometric Brownian motion. Appl. Math. Inf. Sci. 8(1), 107–112 (2014)

    Article  Google Scholar 

  12. Nur Aimi Badriah, N., Siti Nazifah, Z.A., Maheran, M.J.: Forecasting share prices accurately for one month using geometric Brownian Motion. Pertanika J. Sci. Technol. 26(4) (2018)

    Google Scholar 

  13. Bank Negara Malaysia Homepage. http://www.bnm.gov.my/. Accessed 1 July 2014

  14. Dowd, K.: Measuring Market Risk. Wiley, Chichester (2005)

    Book  Google Scholar 

  15. Department of Statistics Malaysia. http://www.statistics.gov.my/main/main.php. Accessed 1 July 2014

  16. Mohd Alias, L.: Introductory Business Forecasting: A Practical Approach, 3rd edn. University Publication Centre (PENA), UiTM Shah Alam, Selangor (2011)

    Google Scholar 

Download references

Acknowledgement

This study is partially funded by the Fundamental Research Grant Scheme (FRGS), Ministry of Higher Education Malaysia that is managed by the Research Management Centre (RMC), IRMI, Universiti Teknologi MARA, 600-IRMI/FRGS 5/3 (83/2016).

Author information

Authors and Affiliations

  1. Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA, Shah Alam, Selangor Darul Ehsan, Malaysia

    Siti Noorfaera Karim & Maheran Mohd Jaffar

Authors
  1. Siti Noorfaera Karim
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maheran Mohd Jaffar
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Maheran Mohd Jaffar .

Editor information

Editors and Affiliations

  1. Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia

    Bee Wah Yap

  2. Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia

    Azlinah Hj Mohamed

  3. Department of Electrical Engineering and Computer Science, University of Tennessee at Knoxville, Knoxville, TN, USA

    Michael W. Berry

Rights and permissions

Reprints and permissions

Copyright information

© 2019 Springer Nature Singapore Pte Ltd.

About this paper

Check for updates. Verify currency and authenticity via CrossMark

Cite this paper

Karim, S.N., Jaffar, M.M. (2019). Forecasting Value at Risk of Foreign Exchange Rate by Integrating Geometric Brownian Motion. In: Yap, B., Mohamed, A., Berry, M. (eds) Soft Computing in Data Science. SCDS 2018. Communications in Computer and Information Science, vol 937. Springer, Singapore. https://doi.org/10.1007/978-981-13-3441-2_15

Download citation

  • DOI: https://doi.org/10.1007/978-981-13-3441-2_15

  • Published:

  • Publisher Name: Springer, Singapore

  • Print ISBN: 978-981-13-3440-5

  • Online ISBN: 978-981-13-3441-2

  • eBook Packages: Computer ScienceComputer Science (R0)

Publish with us

Policies and ethics

Search

Navigation