IDEAS home Printed from https://ideas.repec.org/p/uts/ppaper/2000-2.html
   My bibliography  Save this paper

Backtesting historical simulation value-at-risk for a selected portfolio of South African bonds

Author

Abstract

As financial asset portfolios have become more complex, it has become more difficult for the management of financial institutions to obtain a useful, yet practical measure of market risk. Since modern portfolios contain more derivative instruments, simple linear measures such as standard deviation and duration are inappropriate. Due to this need a market risk measurement technique called Value-at-Risk (VaR) was developed. VaR can be defined as the predicted maximum potential adverse loss of a single financial asset, or portfolio of assets, over a target horizon, within a given confidence interval. A backtesting procedure was designed to compare realized trading results of a selection of representative bonds with model generated risk measures in order to evaluate the accuracy of the VaR model. The backtesting procedure used in this study involves the comparison between the number of times the VaR model under-predicted the subsequent day's loss, versus the number of times such an under-prediction is expected. The empirical results from this study illustrates that VaR underestimated risk during periods of high volatility and overestimated VaR during periods of low volatility, thus rendering it useless as a measure of extreme market movement. The purpose of this study is not to test the validity of VaR, but to illustrate the shortcoming of VaR, in that it measures only market risk. Practitioners should always bear in mind that VaR is a market risk measurement technique and does not warn of extreme market movements.

Suggested Citation

  • Gerhard Van de Venter, 2000. "Backtesting historical simulation value-at-risk for a selected portfolio of South African bonds," Published Paper Series 2000-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ppaper:2000-2
    as

    Download full text from publisher

    File URL: https://journals.co.za/content/meditari/8/1/EJC72592
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wynand Smit & Gary van Vuuren and Paul Styger, 2011. "Economic capital for credit risk in the trading book," South African Journal of Economic and Management Sciences, University of Pretoria, Faculty of Economic and Management Sciences, vol. 14(2), pages 138-152, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:ppaper:2000-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Duncan Ford (email available below). General contact details of provider: https://edirc.repec.org/data/sfutsau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.