Volatility modeling and value at risk analysis of the ALL/EUR exchange rate
Abstract
This study estimates exchange rate risk between the Albanian Lek (ALL) and the Euro (EUR) using a GARCH(1,1) model and Value at Risk (VaR). Monthly data from January 2012 to October 2024 are used to model time-varying volatility in exchange rate returns. VaR is computed at the 95% and 99% confi - dence levels based on the conditional mean and variance. The results show strong volatility persistence, indicating continued exchange rate risk for EUR-denominated assets. Increased uncertainty from mone- tary policy shifts, geopolitical factors, and pandemic-related inflation has raised downside risk. Although estimated losses are moderate, they remain economically significant, highlighting the need for effective exchange rate risk management.Keywords:
GARCH, Value at Risk, Volatility JEL classification: C22, G32, G17Downloads
References
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Bekaert, G., and C. R. Harvey. 2003. “Emerging Markets Finance.” Journal of Empirical Finance 10(1):3–55.
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Çera, G., E. Çera, and G. Lito. 2013. “A GARCH Model Approach to Calculate the Value at Risk of Albanian Lek Exchange Rate.” European Scientific Journal 9(25):1–12.
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Christoffersen, P. F. 2012. Elements of Financial Risk Management. Academic Press.
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Christoffersen, P. F., and F. X. Diebold. 2000. “How Relevant Is Volatility Forecasting for Financial Risk Management?” Revue de Statistique Appliquée 48(1):5–29.
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Engle, R. F., and V. K. Ng. 1993. “Measuring and Testing the Impact of News on Volatility.” Journal of Finance 48(5):1749–1778.
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Friedman, M. 1953. “The Case Is for Flexible Exchange Rates.” In Essays in Positive Economics. University of Chicago Press.
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Jorion, P. 2007. Value at Risk: The New Benchmark for Managing Financial Risk. 3rd ed. McGraw-Hill.
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Krugman, P. R., and M. Obstfeld. 2011. International Economics: Theory and Policy. Pearson.
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Mandelbrot, B. B., and R. L. Hudson. 2004. The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward. Basic Books.
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Nelson, D. B. 1991. “Conditional Heteroskedasticity in Asset Returns: A New Approach.” Econometrica 59(2):347–370.
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Vika, I., and E. Luçi. 2011. “Ekuilibri i Kursit Real të Këmbimit Lekë-Euro: Sa i Shmangur Është Ai?” Discussion paper. Tiranë, Albania. Fatmira Kola, Ardit Gjeci
References
Bekaert, G., and C. R. Harvey. 2003. “Emerging Markets Finance.” Journal of Empirical Finance 10(1):3–55.
Çera, G., E. Çera, and G. Lito. 2013. “A GARCH Model Approach to Calculate the Value at Risk of Albanian Lek Exchange Rate.” European Scientific Journal 9(25):1–12.
Christoffersen, P. F. 2012. Elements of Financial Risk Management. Academic Press.
Christoffersen, P. F., and F. X. Diebold. 2000. “How Relevant Is Volatility Forecasting for Financial Risk Management?” Revue de Statistique Appliquée 48(1):5–29.
Engle, R. F., and V. K. Ng. 1993. “Measuring and Testing the Impact of News on Volatility.” Journal of Finance 48(5):1749–1778.
Friedman, M. 1953. “The Case Is for Flexible Exchange Rates.” In Essays in Positive Economics. University of Chicago Press.
Jorion, P. 2007. Value at Risk: The New Benchmark for Managing Financial Risk. 3rd ed. McGraw-Hill.
Krugman, P. R., and M. Obstfeld. 2011. International Economics: Theory and Policy. Pearson.
Mandelbrot, B. B., and R. L. Hudson. 2004. The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward. Basic Books.
Nelson, D. B. 1991. “Conditional Heteroskedasticity in Asset Returns: A New Approach.” Econometrica 59(2):347–370.
Vika, I., and E. Luçi. 2011. “Ekuilibri i Kursit Real të Këmbimit Lekë-Euro: Sa i Shmangur Është Ai?” Discussion paper. Tiranë, Albania. Fatmira Kola, Ardit Gjeci
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