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

Author

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  • Jitender

    (School of Economics, University of Hyderabad, Hyderabad-500046 (India))

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.

Suggested Citation

  • Jitender, 2021. "Value-at-Risk Estimation of Equity Market Risk in India," Acta Universitatis Sapientiae, Economics and Business, Sciendo, vol. 9(1), pages 1-24, September.
    • Handle: RePEc:vrs:auseab:v:9:y:2021:i:1:p:1-24:n:2
    DOI: 10.2478/auseb-2021-0001
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    References listed on IDEAS

    as
    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    2. Aktham I. Maghyereh & Haitham A. Al-Zoubi, 2006. "Value-at-risk under extreme values: the relative performance in MENA emerging stock markets," International Journal of Managerial Finance, Emerald Group Publishing, vol. 2(2), pages 154-172, July.
    3. Varma, Jayanth R., 1999. "Value at Risk Models in the Indian Stock Market," IIMA Working Papers WP1999-07-05, Indian Institute of Management Ahmedabad, Research and Publication Department.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    value-at-risk (VaR); equity market risk; variance–covariance; historical simulation; financial risk management;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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