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Implications of measuring VaR using Historical simulation; an example of Zagreb Stock Exchange Index
Company: Resource Allocation and Institutions: Explorations in Economics, Finance and Law
Year Of Publication: 2006
Month Of Publication: January
Pages: 367-389
Download Count: 730
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 7-4-2007
Publisher: Administrator
Summary
In this paper the author tests the acceptability of measuring Value at Risk (VaR) withHistorical simulation in Croatian financial market, specifically Zagreb stock exchange.Since its introduction in the early ’80, VaR methodology has become the most popularway of measuring and managing market risk. Value at Risk can be described as the worstloss that can be expected from holding a portfolio of securities, over a certain period oftime, given a specified level of probability, under normal market conditions. The mostcommon classification of VaR methods found in literature is that of: parametric VaRestimates, Historical simulation and Monte Carlo simulation. Each of these approachesfor measuring VaR has its’ own advantages and disadvantages. The author in this paperfocuses on Historical simulation because of its’ three main advantages over theparametric approach for measuring VaR – Historical simulation: (1) does not presumethat returns are normally distributed, (2) is simple to calculate since there is no need forvariance-covariance matrices and (3) can easily accommodate skewness, kurtosis andother features of empirical distribution that cause serious problems for parametricapproach. Assumption of normal “Gaussian” distribution cannot be observed intransitional and emerging economies, and as such could seriously distort the VaR figuresobtained by the use of a parametric approach. The applicability of historical simulation istested on CROBEX index – the stock index of Zagreb stock exchange. Historicalsimulation with five different observation periods (50, 100, 175, 250 and 400 days) istested on CROBEX index. VaR figures at 95% and 99% confidence level are tested foreach of the different opservation periods. In conclusion the results of the research areanalyzed and useful suggestions for future research are
Author(s)
Zikovic, Sasa Sign in to follow this author
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