The Empirical Research About The Exchange Rate Risk Measurement Of Our Country Based On The ARCH Family Models

Since the global financial crisis sweeping across the globe caused by the subprime crisis in 2008, both the world financial and trade system got a heavy toll. Due to the reform and open policy, our country gradually integrates into the world economic system, have been impossible to preserve its own purity and integrity and pay no attention to others, and feels the financial crisis also. Exchange rate as the intermediate carrier of economic development and international trade becomes an indispensable link for the financial crisis spread. And since our country began to practice the floating exchange rate policy with reference to a basket of currencies conditioning in July 21,2005, RMB to all the world's major currencies have different degree of appreciation and currency fluctuations. After the outbreak of the financial crisis, the RMB exchange rate is also subjected to the international society's huge appreciation pressure. But Chinese economy is mainly export-oriented economy, a large number of enterprise's survival depends on exports, the rise in RMB goes against the development of our national economy, even for China's economy has huge impact. Because our country for a long time implements a fixed exchange rate system, and RMB keeps connected with U.S. dollar, every Chinese economic currently lack adequate mature awareness to understanding of the exchange rate risk, and is very weak in the consciousness to mitigate the risk of exchange rate. In the era of floating exchange rates, especially underling the influence of the financial crisis now, whether in the current or in the future, to avoid RMB exchange rate risk is a major issue for every Chinese economic subject. Facing the further appreciation potential of RMB exchange rate, this paper does research on exchange rate risk to provide guidance for the foreign exchange risk of management and foreign exchange risk aversion.In recent years, the international popular measurement of financial market risk is VaR method. But in our country, VaR model was more used in the stock market field, the study according to the RMB exchange rate risk is relatively less. And with the reformation of China's exchange rate system, the exchange market gradually developed into market liberalization. This makes using VaR model to measure RMB exchange rate risk possible. And ARCH family models have strong depicting ability for dynamic characteristics of yield sequences, can strongly catch asymmetrical characteristic of exchange rate series.Firstly, the paper introduces the foundation of exchange rate risk in theory. The first section is the change of China's exchange rate system. Overall, China's exchange rate system experienced a process from a highly centralized planning management model to the marketization. Exchange rate system is a very important connection between one country economy and other countries economies. That also determined the expression of exchange rate to be fixed or floating. It also greatly affects the risk of exchange rate. Generally, in the floating exchange rate system, the future specific value of the exchange rate is more difficult to determine, the risk of exchange rate will be greater. But, fixed exchange rate system has defects, too. The countries who take the fixed system will lose the ability to adjust export. Once these governments are attacked by financial groups such as hedge funds, the governments will likely easing restrictions; it can cause greatly vibration of exchange rate. The next introduced the definition and classification of the exchange rate risk. The risk of exchange rate is different from foreign exchange risk, is the narrow sense of foreign exchange risk. The generalized foreign exchange risk still includes the national policy risk and so on. The foreign exchange risk this article referred to is exchange rate risk, that means unexpected exchange rate fluctuations. And the most common classification of exchange rate risk is that the risk of exchange rate is divided into trade risk, convert risk and economic risk. The third section is the factors affect exchange rate. There are a lot of factors affect exchange rate fluctuations, but this article mainly introduced six factors:the international balance of payments and foreign exchange reserves, prices and inflation, interest rate, economic growth, policy factors and expected factors. Finally, mainstream financial risk measurement methods have the sensitivity analysis, volatility analysis and VaR method. Among them, the VaR method is more advanced measuring method.Secondly, the article introduces the ARCH family models and exchange rate risk measurement models. The ARCH family models have widely members. The most basic is the ARCH model. The other models are developed from the ARCH model, including GARCH model, GARCH-M model and so on. The ARCH family models are the outstanding person in the volatility models. Whether in the depth of the theoretical research or in the practical application of universality, all other volatility models can not compare with the ARCH family models. Then, the paper introduces VaR method from four aspects:historical background, definition, characteristics and the method of calculation.Once again is the main empirical part. For the representation of the research, the paper chooses the exchange rates which occupy important positions in our country's foreign trade to analysis. These are the Yuan against dollar, euro, yen and sterling, and Hong Kong dollar reference rate daily. Because the exchange rate risk comes from the fluctuation of exchange rate, so after doing the logarithmic and differential treatment to the time series, first of all analyses the fluctuation characteristics of the yield sequences we get. This paper analyses the yield sequences from five sides:the statistical analysis, stationarity test, normality test, correlation test, ARCH effect inspection. The results prove the ARCH family models and VaR model can be used. Again according to the test results to choose and establish suitable ARCH family models, and to forecast and measure exchange rate risk.At length, this paper draws conclusion according to the empirical research conclusions, and summarizes the full text. But the prediction results of this paper is not so ideal, because our government still has strong control to the exchange rate. We need to find out breakthroughs from his main influence factors of exchange rate to avoid the risk of exchange rate.