Modeling value-at-risk for international portfolios in different jump-diffusion processes

ABSTRACT This paper uses Poisson jump risk and exchange-rate risk to consider asset returns and exchange rates under different jump-diffusion processes, to provide an analytical value-at-risk (VaR) for international portfolios and to manage market risk during the subprime mortgage crisis. In contrast to past studies, the model allows the dynamic processes of asset returns and exchange rates to follow different jump-diffusion processes. This model considers portfolios not only with jump risk but also with exchange-rate risk, which is vital for investors in highly integrated global financial markets. The analytical VaR solution is confirmed as reliable by backtesting, Christoffersen's independence test and Monte Carlo simulation over various periods. The model may be regarded as an extension of those of Kupiec and Chen and Liao.