One Approach for Backtesting VaR Specifications in the Russian Stock Market

Tamara Viktorovna Teplova, Dmitry Pavlovich Ruzanov

Abstract


Currently Value-at-Risk (VaR) indicator is widely used in financial risk management as a popular instrument for market risk quantification. Our paper documents that historical VaR has some limitation for national high volatility emerging stock markets. We conduct empirical analysis of various statistical tests of VaR estimation and propose an algorithm for optimal VaR specification in terms of accuracy of VaR estimates for high volatility national financial markets. We used historical and semi parametric VaR (EWMA Var and volatility adjusted VaR). For each method we consider 16 VaR specifications (which are different combinations of time horizon – 120, 250, 500 and 1000 trading days, and confidence intervals – 90%, 95%, 99%, 99.5%). We consider  the unstable Russian stock market with two main Russian indexes – MICEX and RTS and blue chips. Our results of testing the algorithm show that VaR with our method of algorithmically defined parameters is more effective than commonly used estimation procedure.

DOI: http://dx.doi.org/10.5755/j01.ee.30.1.17795


Keywords


Value-at-Risk (VaR); Backtesting; VaR Specification; Semi-Parametric VaR; EWMA Var; Volatility Adjusted VaR; Russian Stock Market

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Print ISSN: 1392-2785
Online ISSN: 2029-5839