A Scenario-Based Approach to Optimal Currency Overlay

Duarte, Antonio Marcos; Rajagopal, Ram

doi:10.3905/jpm.1999.319758

Cited by 1 publication

(1 citation statement)

References 30 publications

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“…The direct use of the standard mathematical models proposed and tested in more developed markets is not always recommended in emerging markets. For example, extreme events Embrechts et al (1997) in emerging markets have already been verified to completely distort the results obtained when using standard mathematical models (that is, those used by practitioners in more developed markets) in several situations, such as hedging using futures contracts (Duarte and Mendes, 1998), systematic risk estimation (Duarte and Mendes, 1997), Value-at-risk computation , volatility estimation (Mendes and Duarte, 1999), currency overlay (Duarte and Rajagopal, 1999), estimating term structures of interest rates (Almeida et al, 1998), and optimal portfolio structuring (Reyna et al, 1999b).…”

Section: Introductionmentioning

confidence: 99%

Optimal Portfolio Structuring in Emerging Stock Markets Using Robust Statistics

Reyna¹,

Júnior

Mendes

et al. 2005

Brazilian Review of Econometrics

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Emerging markets are known to have unique characteristics when compared to more developed markets. The direct use of standard mathematical models proposed and tested in more developed markets is not always recommended in emerging markets. Extreme events in emerging markets have already been verified to distort the results obtained when using standard mathematical models in several situations, including optimal portfolio structuring. Practitioners working in the asset management industry in emerging markets have not yet incorporated optimization models into their routine. One of the reasons for that is that extreme events and/or economic discontinuities (such as the Brazilian and the Argentinean devaluation crises etc.) modify the financial environment in such a way that past data become of little use when looking forward. In this article we concentrate on proposing a methodology to handle extreme events. Two numerical examples taken from the Brazilian stock market are used to illustrate the use of our proposal.

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