Sensitivity of Value at Risk estimation to NonNormality of returns and Market capitalization

Pankaj Sinha and Shalini Agnihotri

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates sensitivity of the VaR models when return series of stocks and stock indices are not normally distributed. It also studies the effect of market capitalization of stocks and stock indices on their Value at risk and Conditional VaR estimation. Three different market capitalized indices S&P BSE Sensex, BSE Mid cap and BSE Small cap indices have been considered for the recession and post-recession periods. It is observed that VaR violations are increasing with decreasing market capitalization in both the periods considered. The same effect is also observed on other different market capitalized stock portfolios. Further, we study the relationship of liquidity represented by volume traded of stocks and the market risk calculated by VaR of the firms. It confirms that the decrease in liquidity increases the value at risk of the firms.

Keywords: Non-normality; market capitalization; Value at risk (VaR); CVaR; GARCH (search for similar items in EconPapers)
JEL-codes: C51 C52 C58 G01 G20 G22 G24 G28 (search for similar items in EconPapers)
Date: 2014-03-10, Revised 2014-05-26
New Economics Papers: this item is included in nep-ecm and nep-rmg
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