The Effects of Risk Modelling: Assessing Value-at-Risk Accuracy

Zatul Karamah Ahmad Baharul-Ulum (), Ismail Ahmad (), Norhana Salamudin () and Norzaidi Mohd Daud ()
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Zatul Karamah Ahmad Baharul-Ulum: Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan, Malaysia
Ismail Ahmad: Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia
Norhana Salamudin: Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia
Norzaidi Mohd Daud: Office of Community of Research, Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia.

Institutions and Economies (formerly known as International Journal of Institutions and Economies), 2015, vol. 7, issue 2, 1-29

Abstract: This study examines Value-at-Risk (VaR) models that are integrated with several volatility representations to estimate the market risk for seven nonfinancial sectors traded on the first board of the Malaysian stock exchange. In a sample that spanned 19 years from1993 until 2012 for construction, consumer product, industrial product, plantation, property, trade and services and mining sectors, the expected maximum losses are quantified at 95% confidence level. For accuracy determination, assessments using Kupiec test and Christoffersen test have provided evidence that almost every model are found to be accurate for all sets of occurrence. However, using the Lopez test which takes into consideration the magnitude of the impact of exceptions, the most accurate model is the VaR which is integrated with GARCHt. This study found that fat tails and asymmetries are important issues that need to be considered when estimating VaR in managing financial risks.

Keywords: Backtesting; Value-at-Risk; Volatility Modelling (search for similar items in EconPapers)
JEL-codes: C53 G10 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:umk:journl:v:7:y:2015:i:2:p:1-29

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