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Risk Management in the Financial Services Sector—Applicability and Performance of VaR Models in Pakistan

Listed author(s):
  • Syeda Rabab Mudakkar

    (Centre for Mathematics and Statistical Sciences, Lahore School of Economics, Lahore)

  • Jamshed Y. Uppal

    (Department of Business and Economics, Catholic University of America, Washington, DC, USA)

Sound risk management practices by financial institution are critical to the stability of the institutions and to the sustainability of economic growth. We evaluate market risk based on the Value-at-Risk (VaR) approach for the KSE100 index return series over the period January 2001–June 2012. We estimate the conditional quantiles of the loss distribution under different distributional assumptions. Our back-testing results show that the procedure based on the Extreme Value Theory (EVT) performs better than methods which ignore the heavy tails of the innovations or the heteroskadasticity in returns. Analysis of Pre- and Post-Global Financial Crisis suggests that EVT based VaR measures which incorporate market dynamics may be helpful in managing market risk.

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File URL: http://www.pide.org.pk/pdf/PDR/2012/Volume4/399-417.pdf
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Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 51 (2012)
Issue (Month): 4 ()
Pages: 399-417

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Handle: RePEc:pid:journl:v:51:y:2012:i:4:p:399-417
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