ABSTRACT

This paper proposes a procedure for using a GARCH or exponentially weighted movingaverage model in conjunction with historical simulation when computing value at risk. Itinvolves adjusting historical data on each market variable to reflect the difference betweenthe historical volatility of the market variable and its current volatility. We compare theapproach using nine years of daily data on 12 exchange rates and 5 stock indices with thehistorical simulation approach and show that it is a substantial improvement.