Volatility modeling and value at risk analysis of the ALL/EUR exchange rate
This study estimates exchange rate risk between the Albanian Lek (ALL) and the Euro (EUR) using a GARCH(1,1) model and Value at Risk (VaR). Monthly data from January 2012 to October 2024 are used to model time-varying volatility in exchange rate returns. VaR is computed at the 95% and 99% confi - dence levels based on the conditional mean and variance. The results show strong volatility persistence, indicating continued exchange rate risk for EUR-denominated assets. Increased uncertainty from mone- tary policy shifts, geopolitical factors, and pandemic-related inflation has raised downside risk. Although estimated losses are moderate, they remain economically significant, highlighting the need for effective exchange rate risk management.