1. bookVolume 9 (2021): Issue 1 (September 2021)
Journal Details
License
Format
Journal
eISSN
2360-0047
First Published
17 Oct 2014
Publication timeframe
1 time per year
Languages
English
access type Open Access

Value-at-Risk Estimation of Equity Market Risk in India

Published Online: 27 Sep 2021
Volume & Issue: Volume 9 (2021) - Issue 1 (September 2021)
Page range: 1 - 24
Journal Details
License
Format
Journal
eISSN
2360-0047
First Published
17 Oct 2014
Publication timeframe
1 time per year
Languages
English
Abstract

The value-at-risk (Va) method in market risk management is becoming a benchmark for measuring “market risk” for any financial instrument. The present study aims at examining which VaR model best describes the risk arising out of the Indian equity market (Bombay Stock Exchange (BSE) Sensex). Using data from 2006 to 2015, the VaR figures associated with parametric (variance–covariance, Exponentially Weighted Moving Average, Generalized Autoregressive Conditional Heteroskedasticity) and non-parametric (historical simulation and Monte Carlo simulation) methods have been calculated. The study concludes that VaR models based on the assumption of normality underestimate the risk when returns are non-normally distributed. Models that capture fat-tailed behaviour of financial returns (historical simulation) are better able to capture the risk arising out of the financial instrument.

Keywords

JEL Classification

Alexander, C. (2009). Market risk analysis, value at risk models. Vol. 4. John Wiley & Sons. Search in Google Scholar

Butler, C. (1999). Mastering value at risk: A step-by-step guide to understanding and applying VaR. Financial Times/Prentice Hall. Search in Google Scholar

Chowdhury, P. D.; Bhattacharya, B. (2015). Estimation of value at risk (VaR) in the context of the global financial crisis of 2007–08: Application on selected sectors in India. Indian Journal of Research in Capital Markets 2(2): 7–25. Search in Google Scholar

Coronado, M. (2000). Comparing different methods for estimating value-at-risk (VaR) for actual non-linear portfolios: Empirical evidence. Working paper – Facultad de Ciencias Economicas y Empresariales, ICADE, Universidad P. Comillas de Madrid, Madrid, Spain. Search in Google Scholar

Crouhy, M., Galai, D.; Mark, R. (2006). The essentials of risk management. Vol. 1. New York: McGraw-Hill. Search in Google Scholar

Dowd, K. (2007). Measuring market risk. John Wiley & Sons. Search in Google Scholar

Dutta, D.; Bhattacharya, B. (2008). A bootstrapped historical simulation value at risk approach to S & P CNX Nifty. The National Conference on Money and Banking, IGIDR, Mumbai, India. Search in Google Scholar

Harmantzis, F. C.; Miao, L.; Chien, Y. (2006). Empirical study of value-at-risk and expected shortfall models with heavy tails. The Journal of Risk Finance 7(March): 117–135. Search in Google Scholar

Kisacik, A. (2006). High volatility, heavy tails and extreme values in value at risk estimation. Institute of Applied Mathematics, Financial Mathematics/Life Insurance Option Program, Middle East Technical University – term project. Search in Google Scholar

Kupiec, P. (1995). Techniques for verifying the accuracy of risk measurement models. The Journal of Derivatives 3(2): 76–84. Search in Google Scholar

Maghyereh, A. I.; Al-Zoubi, H. A. (2006). Value-at-risk under extreme values: The relative performance in MENA emerging stock markets. International Journal of Managerial Finance 2(July): 154–172. Search in Google Scholar

Morgan, J. P. (1996). Risk metrics technology document. Morgan Guaranty Trust Company of New York, New York. 35–65. Search in Google Scholar

Nath, G. C.; Samanta, G. P. (2003). Value at risk: Concept and its implementation for Indian banking system. Available at: https://ssrn.com/abstract=473522. Search in Google Scholar

Penza, P.; Bansal, V. K.; Bansal, V. K.; Bansal, V. K. (2001). Measuring market risk with value at risk. Vol. 17. John Wiley & Sons. Search in Google Scholar

Philippe, J. (2001). Value at risk: The new benchmark for managing financial risk. NY: McGraw-Hill Professional. Search in Google Scholar

Poornima, B. G.; Reddy, Y. V. (2017). An analysis of portfolio VaR: Variance– covariance approach. IUP Journal of Applied Finance 23(3): 63–79. Search in Google Scholar

Şener, E.; Baronyan, S.; Mengütürk, L. A. (2012). Ranking the predictive performances of value-at-risk estimation methods International Journal of Forecasting 28(4): 849–873.10.1016/j.ijforecast.2011.10.002 Search in Google Scholar

Sollis, R. (2009). Value at risk: A critical overview Journal of Financial Regulation and Compliance 17(November): 398–414.10.1108/13581980911004370 Search in Google Scholar

Samanta, G. P.; Jana, P.; Hait, A.; Kumar, V. (2010). Measuring market risk – An application of value-at-risk to select government bonds in India Reserve Bank of India Occasional Papers 31(1): 2–32. Search in Google Scholar

Varma, J. R. (1999). Value at Risk Models in Indian Stock Market. Working paper no. 99-07-05. Indian institute of Management. Search in Google Scholar

Venkataraman, S. (1997). Value at risk for a mixture of normal distributions: The use of quasi-Bayesian estimation techniques Economic Perspectives – Federal Reserve Bank of Chicago 21: 2–13. Search in Google Scholar

Zangari, P. (1996). An improved methodology for measuring VaR RiskMetrics Monitor 2(1): 7–25. Search in Google Scholar

Recommended articles from Trend MD

Plan your remote conference with Sciendo