Extreme value theory and Monte Carlo simulation: An application to emerging markets exchange rates

In this study, the maximum amount of losses to which the emerging market currencies including Brazilian Real, Mexico Peso, South Korean Won, New Taiwan Dollar, Indian Rupee, Thailand Bahd, Turkish Lira and South African Rand can be exposed due to extreme financial conditions is measured by using value-at-risk based on extreme value theory (EVT-VaR). In order to take into account the different trading positions (i.e. long and short ones) both upside and downside market risks are considered. In all cases expected shortfall is also calculated. The findings based on EVT-VaR show that in the case of extreme financial conditions in foreign exchange markets of the countries concerned, the highest losses for both short and long positions are in Brazilian Real and south African Rand; while the lowest losses are in New Taiwan Dollar, Thai Baht and Indian Rupee. In all cases ES also indicates the similar results. Lastly, for comparative analyses, the study also includes risk analyzes based on Monte Carlo simulation, representing losses in normal market conditions