A comparative study on value at risk and conditional value at risk with an application to the Malaysian financial market
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Date
2012-03-14
Journal Title
Journal ISSN
Volume Title
Publisher
African Journal of Business Management
Abstract
Value at risk (VaR) and conditional value at risk (CVaR) are frequently used as risk measures in risk
management. VaR estimates the maximum expected loss over a given time period at a given
acceptance level, whereas CVaR measures the extreme risk or the risk beyond VaR. This paper aims to
perform an empirical study on VaR and CVaR based on the daily returns of the Malaysian stock markets
traded in Kuala Lumpur Composite Index (KLCI) over a time period using the RiskMetrics and the peaks
over the threshold (POT) methods. In particular, the IGARCH (1, 1) model is applied for the RiskMetrics
method, whereas the generalized Pareto distribution (GPD), a distribution based on an extreme value
theory, is considered for the POT method. The results show that the GPD, which is considered in the
POT method, provides an adequate fit to the data of threshold excesses, and the POT is a more reliable
measure of risks compared to the RiskMetrics.
Description
Keywords
Value at risk, conditional value at risk, RiskMetrics, peaks the over threshold, IGARCH, generalized Pareto