Estimating Value at Risk for Base Metals under Exchange Rate Shocks

In this paper we formulate the volatility of the Metal Index, by an ARJI-GARCH model, with reference to the effect of the volatility of dollar exchange rate. We express the jump in the dollar exchange rate by an Autoregressive Conditional Jump Intensity (ARJI) model, and then use the output to model the volatility of Tehran Base Metal Index by GARCH. To test the model, we calculate VaR using the ARJI-GARCH volatility, and the GARCH volatilities without considering the dollar exchange rate volatility or the jump in it. We calculate the referred VaR also by an exponentially time weighted historical simulation method. We test the accuracy and preciseness of the resulted VaRs by the associated statistical tests, and conclude that the ARJI-GARCH model is well suited for forecasting volatility in this context