(Luận văn) applying three var value at risk approaches in measuring market risk of stock portfolio the case study of vn 30 stocks basket in hose

Policies and Sustainable Economic Development | 595 t to Applying Three VaR (Value at Risk) Approaches ng in Measuring Market Risk of Stock Portfolio: hi ep The Case Study of VN-30 Stocks Basket in HOSE w n ad lo NGUYEN QUANG THINH School of business, International University, Vietnam National University-Ho Chi Minh City u yj th Email: thinhnguyen23394@gmail.com, yi pl VO THI QUY n ua al School of business, International University, Vietnam National University-Ho Chi Minh City m ll fu Abstract n va Email: vtquy@hcmiu.edu.vn t n oi This study examines and applies the three statistical value at risk models including The VarianceCovariance, Historical Simulation, and Monte Carlo Simulation in measuring market risk of VN-30 portfolio of Ho Chi Minh stock exchange (HOSE) in Vietnam stock market and some back-testing techniques in assessing the validity of the VAR performance in the timeframe of 30/01/2012-26/02/2016 The finding results of the models are conducted from two volatility methods of stock price: SMA and EWMA throughout the five chosen confidence level: 90%, 93%, 95%, 97.5%, and 99% The findings of the study show that the differences among the results of three models are not significant Additionally, three VAR models have generally the similar accepted range assessed in both types of back-tests at all confidence levels considered and at the 97.5% confidence level, and they can work best to achieve the highest validity level of results in satisfying both conditional and unconditional back-tests The Monte Carlo Simulation (MCS) has been considered the most appropriate method to apply in the context of VN-30 portfolio due to its flexibility in distribution simulation Recommendations for further research and investigations are provided accordingly z z j ht vb k m gm om l.c Keywords: value at risk; market risk; stock portfolio; back-tests; variance-covariance; historical simulation; an Lu Monte Carlo simulation n va y te re 596 | Policies and Sustainable Economic Development Introduction t to ng hi Risk management is a crucial concern in many institutions and countries around the world The financial crises have exposed the uncertainty to investors’ portfolios The movements of stock price, exchange rate, interest rate and commodity price are the sources of market risk that may cause potential losses to portfolio’s value (Jorion, 2001) According to Duda and Schmidt (2009), many banks and institutions have been taking significant impacts in measuring market risk to set up an adequate capital base for their activities Frain and Meegan (1996) had the same point of view as laying out several losses in banks and corporations in the U.S Hence the need for a suitable market risk measurement tool that can measure and set up an adequate capital base reserve as a cushion against potential losses is important Cassidy and Gizycki (1997) assumed that Value at Risk (VAR) is a widely used technique nowadays in measuring market risk VAR measures the potential loss that would likely to occur if adverse movements in the market happen VAR has become a standard measure for financial analysts to quantify market risk and accurately measure the high changes in prices due to three key characteristics: a specified level of loss, a fixed period of time and a confidence level (Angelovska, 2013) ep w n ad lo yi u yj th pl n ua al n va m ll fu Vietnam stock market has been developing and popular with insider trading, herding behavior and a lot of inexperienced individual investors that would create more market risk to the players This study applied three basic VAR models, Variance-Covariance method, Historical Simulation method, and Monte Carlo Simulation method to find the market risk of VN-30 stock portfolio and examine the differences among them Moreover, we also conducted some basic back-testing methods to test the accuracy and validity of the three models VN-30 stocks basket of HOSE chosen because it contains top 30 highest capitalization stocks (around 80% of HOSE) with the trading volume around 60% of HOSE, and attracts attention of both local and foreign investors t n oi z z j ht vb k gm om l.c 2.1 Definition m Literature review n y te re VAR(1- α)= MV*Z(1- α)*σ; with 1- α is the level of confidence and Z is the standard normal statistical value relative to 1- α va VAR approaches are conducted based on the assumption of normality, with the general formula of VAR as: an Lu Value at Risk (VAR) is a method of measuring the maximum potential loss of the portfolio in specific period of time in relative with a confidence level or it can be said as the minimum potential loss that the portfolio will be exposed to in a given level of significance (Jorion, 2001) For instance, your initial portfolio value is V(0), current value of your portfolio is V and the chosen confidence level is 95% and hence the VAR(95%) is the amount of loss in which P[V-V(o) j and j ≥ z Aj,j t Ai,j = n oi Ai,i =√Ci, i − ∑𝑖−1 𝑝=1 Ai, p ; for i= 2, 3,… 30; z j ht vb We will create an appropriate (30x30) matrix A to find the correlated random standard normal variables Фi m k - Find the correlated random standard normal variables Фi for the relative 30 stocks with the matrix A has just been found and a vector of random standard normal variables Zi(kΔT) which is inversely derived from random number between and 1, as follow: gm om l.c an Lu (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose y te - Repeat step (6) with 270 times of draws (k=1,2…270) from a normal distribution of N(0,1) to find the vector of standard normal variables Zi(kΔT) for each unit of incremental time ΔT and create the Фi(kΔT) for 270 incremental times ΔT of one day simulation re And then we have the relative Ф1(kΔT), Ф2(kΔT) …Ф30(kΔT) for stock 1, stock 2…stock 30, respectively n k = (1,2…270) and (i, j = 1, 2, 3…30) va 𝑍1(𝑘ΔT) 𝑍2(𝑘ΔT) … Фi (kΔT) = A * = ∑𝑖𝑗=1 Ai, j ∗ Zj(𝑘ΔT); … [𝑍30(𝑘ΔT)] (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose 606 | Policies and Sustainable Economic Development - Because we need to create simulated stock returns are normally distributed with the mean of t to ng 𝑅𝑖(ΔT) and standard deviation of 𝜎𝑖 (ΔT), we will simulate the stock’s value with the relative correlated random standard normal variable Фi(kΔT) periodically as follow: hi ep Ri(kΔT)= 𝑅𝑖(ΔT) + 𝜎𝑖 (ΔT) ∗ Фi(kΔT), with k= (1,2,3….270) and Ri(k) is the stock return generated with Z(kΔT) w n Si(kΔT)= Si(0)*∏𝑁 𝑘=1 exp[𝑅𝑖(ΔT) + Фi(kΔT) 𝜎𝑖 (ΔT)] lo ad - Calculate the simulated portfolio value at the end of the day as the sum of 30 stocks’ value investment simulated at k=270: u yj th Vp = S1(270ΔT) + S2(270ΔT) +…+ S30(270ΔT); where Vp is the simulated portfolio value yi pl - Repeat the simulation of 30 stocks in step (8) with their relative correlated random standard normal variable Фi(kΔT) for 10000 times to create 10000 scenarios of potential 30 stocks’ values tomorrow and find the relative 10000 simulated portfolio values as in step (9) n ua al n va - Find the changes of each simulated scenario by (Vp - 100,000,000VND) and thus we have 10000 scenarios of changes in portfolio value tomorrow fu m ll - Arrange these changes in an order and find the VAR with the desired level of confidence just like in the historical simulation approach t n oi 3.3 The back-testing process z For the back-tests, we will conduct each method to back-test the result of VAR models in order to accept or reject the model base on the critical value of statistical test introduced above throughout chosen confidence levels In general, the process can be generalized as follow: z j ht vb k m - We select a significance level in order to estimate the critical value related to the null hypothesis being true gm om l.c - Calculate the likelihood ratios of each method (or statistical value) and compare to the relative critical value with relative degrees of freedom for confidence levels n va Data results and discussion an Lu If the result of ratios (or calculated statistical value)> critical value of significant level with chisquare distribution with relative degree of freedoms, the VAR result is rejected or accepted if otherwise y te re 4.1 VAR results In general, the changes of proportion of market capitalization at a specific position i through time are not much The weight i for each position i in the portfolio was calculated and we had the results as follow: (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose Policies and Sustainable Economic Development | 607 Table t to AVG.Weight AVG.Return 12,200% -0,008% 10,670% 0,065% 9,576% 0,026% 7,748% 0,093% 6,445% 0,012% 5,729% 0,104% 5,456% -0,016% 4,639% -0,054% 4,334% 0,005% 3,849% 0,049% 3,431% 0,137% hi Stock lo ng Average weight distribution of stock 1-stock 30 from highest to smallest weight ep w n ad pl 10 yi u yj th 12 2,821% 0,090% 2,639% -0,002% 2,468% 0,010% 2,108% 0,006% va 13 n n ua al 11 14 m ll fu 15 16 1,997% 17 1,784% 0,043% 18 1,681% 19 1,474% 20 1,260% 21 1,154% 22 1,028% 23 0,972% 24 0,895% 25 0,785% 26 0,722% -0,064% 27 0,654% -0,048% 28 0,586% 0,073% 29 0,505% -0,124% 30 0,391% -0,006% n oi -0,011% t 0,151% 0,072% z 0,044% z vb 0,065% j ht 0,039% 0,075% k m 0,051% gm 0,131% om l.c an Lu n va The volatilities of the portfolio calculated from two methods SMA and EWMA are presented in Table as below: re y te Table Portfolio’s SMA-Volatility Portfolio Variance (SMA) Portfolio STD (SMA) 0,000126812 0,011261077 (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose 608 | Policies and Sustainable Economic Development Table t to ng Portfolio’s EWMA-volatility hi Portfolio STD (EWMA) 0,000117506 0,010840036 ep Portfolio Variance (EWMA) w The difference between the results of two portfolio’s volatilities exists However, the difference is very small or the two results are approximately equal and hence it would be suggested that the VAR results measured in the same model for a given confidence level would be the same under any of these types of volatility used, and also the similar back-test results Following up, the VAR results of the models throughout confidence levels with the two types of volatility are shown in Table n ad lo yi u yj th Table pl VAR results n ua al SMA VarianceCovariance Monte Carlo Simulation (2.563.666,35) (3.305.720,87) (2.521.769,48) (2.445.310,79) Exceptions (x) 10,00 22,00 22,00 10,00 22,00 25,00 x/T 0,01 0,02 0,02 0,01 0,02 0,02 (2.434.051,12) (2.207.130,62) (2.120.234,22) 25,00 31,00 34,00 x/T 0,02 0,03 0,03 95% (1.773.356,90) (1.852.282,40) Exceptions (x) 52,00 x/T 93% n oi (2.434.051,12) Exceptions (x) t m ll (2.619.718,35) 97,50% Historical Simulation fu (3.305.720,87) 99,00% Monte Carlo Simulation n VarianceCovariance va Historical Simulation EWMA (2.124.608,02) (2.047.539,13) 34,00 40,00 0,02 0,03 0,04 (1.794.474,97) (1.773.356,90) (1.783.027,26) (1.700.122,70) 49,00 52,00 52,00 0,05 0,05 0,05 0,05 z 25,00 z 55,00 0,05 0,05 j ht vb 52,00 (1.661.899,70) (1.608.279,30) (1.535.748,08) (1.599.762,79) (1.527.358,64) 67,00 56,00 61,00 67,00 62,00 67,00 x/T 0,07 0,06 0,06 0,07 0,06 90% (1.234.030,91) (1.443.165,14) (1.379.677,99) (1.234.030,91) (1.389.206,52) 101,00 77,00 81,00 101,00 80,00 0,10 0,08 0,08 0,10 0,08 gm 0,07 (1.322.558,00) om l.c x/T k Exceptions (x) m (1.535.748,08) Exceptions (x) 91,00 0,09 n va y te re (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose an Lu In Table 6, from 90% to 99% confidence level, we find our VAR results generated from the models would not be significantly different from each other for a given confidence level, especially the variance-covariance results and Monte Carlo simulation results However, at 95%, models’ results are approximately similar, but the difference among results of models becomes larger as we move further away from the 95% point As we move closely to 99%, the values of variancecovariance and Monte Carlo simulations are smaller than of the historical simulation And the opposite outcome happens as we move closely to 90% The reason for this could be explained as two reasons: (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose Policies and Sustainable Economic Development | 609 t to ng hi ep The historical simulation is found from the real past movements of the portfolio and hence the model results obviously capture merely the same failure rate observed while the Variance-Covariance and Monte Carlo simulation with 10000 simulations still extract VAR from a normal condition distribution Hence the values of VC and MCS are the most approximate while the historical simulation has a little bit more different record from those two methods w The actual distribution of the portfolio data has a positive kurtosis of (2,7323) having a fatter tail than the normal distribution Thus, the 95% point seems to be intersection of the actual data distribution, and the normal data distribution assumed because models’ results are approximate the most at this 95% confidence level A fatter tail means greater actual losses at the left end tail (from 95%-99% and more) of the distribution comparing to the losses measured with normal market conditions n ad lo yi u yj th pl 4.2 Comparisons with previous findings n ua al n va The similarity between our findings and previous studies are our distribution of the empirical data having a positive kurtosis, which means having a fatter tail than a true normal distribution and as the result, the value of historical simulation’s VAR is higher than both the variance –covariance method and the Monte Carlo simulation methods as the confidence level converges to the left-end tail (close to 99%) of the distribution m ll fu n oi t However, the difference of our research results from that of previous the VAR of the Monte Carlo simulation is more likely approximate the results of variance-covariance method than the results of historical simulation Some users use 100 times of simulation and hence the MCS’s results are approximate the historical simulation’s results z z j ht vb 4.3 Back-test results m k The back-tests was conducted for five chosen confidence level: 99%, 97.5%, 95%, 93% and 90% confidence level throughout models under both types of volatilities used In general, the back-tests’ results of models from methods of volatilities have similar results Below are the results of each back-test gm om l.c 4.3.1 Kupiec’s proportion of failure (POF) test Lu an The POF test showed that the most acceptable range of the test is around the 95% confidence level and the rejected results of the variance-covariance and Monte Carlo simulation method at the 99% and 90% confidence level Historical simulation results are all accepted and presented in Table n va y te re (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose 610 | Policies and Sustainable Economic Development Table t to ng POF test’s results hi POF Test (SMA) ep Historical Simulation 0,00255847 n LR(POF) w 99% Monte Carlo Simulation 10,45361826 0,002558467 10,45361826 15,56090087 6,634896601 6,634896601 6,634896601 6,634896601 Accept Reject Reject Accept Reject Reject 1,184475294 2,704450666 0,006494039 2,704450666 7,346670145 5,023886187 5,023886187 5,023886187 5,023886187 Accept Accept Accept Reject 0,00649404 Critical value 5,02388619 Accept n ua al 95% 5,023886187 pl Accept yi LR(POF) Conclusion VarianceCovariance 10,45361826 u yj th 97,50% Historical Simulation 6,634896601 ad Conclusion Monte Carlo Simulation 6,6348966 lo Critical value VarianceCovariance POF Test (EWMA) 0,02961839 0,067901198 0,029618393 0,029618393 0,029618393 0,356353943 Critical value 3,84145882 3,841458821 3,841458821 3,841458821 3,841458821 3,841458821 Accept Accept Accept Accept Accept Accept LR(POF) 0,26135833 3,710777531 1,62164719 0,261358332 1,310703 0,261358332 Critical value 3,28302029 3,283020287 3,283020287 3,283020287 3,283020287 3,283020287 Accept Reject Accept Accept Accept Accept n Conclusion va LR(POF) fu t 90% n oi Conclusion m ll 93% z 0,00394392 7,161285268 4,952349795 0,003943917 5,463561327 1,268913099 Critical value 2,70554345 2,705543454 2,705543454 2,705543454 2,705543454 2,705543454 Accept Reject Reject Accept Reject Accept j ht vb Conclusion z LR(POF) m k Following from Table, there are still some unexpected accepted results of EWMA-MCS at 90% and rejected results of SMA-VC and of EWMA-MCS at 93% and 97.5% respectively But in general, the most trustful range of validity lie from 93%-97.5% because most results of models from both volatility methods are accepted gm om l.c 4.3.2 Time until first failure test (Tuff test) Lu an Table Tuff Test n va Tuff test’s results Tuff Test Monte Carlo Simulation Historical Simulation VarianceCovariance Monte Carlo Simulation 0,034482759 0,034482759 0,034482759 0,034482759 0,034482759 0,034482759 1,07345361 1,07345361 1,07345361 1,07345361 1,07345361 1,07345361 6,634896601 6,634896601 6,634896601 6,634896601 6,634896601 6,634896601 99% 1/V Tuff (LR) Critical value (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose y te VarianceCovariance re Historical Simulation (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose Policies and Sustainable Economic Development | 611 Tuff Test Tuff Test ng VarianceCovariance Monte Carlo Simulation Historical Simulation VarianceCovariance Monte Carlo Simulation Accept Accept Accept Accept Accept Accept 1/V 0,034482759 0,034482759 0,037037037 0,034482759 0,037037037 0,090909091 Tuff (LR) 0,095850586 0,134944633 0,140114136 0,095850586 0,140114136 1,182120926 n t to Historical Simulation 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 Accept Accept Accept Accept Accept Accept 0,090909091 0,090909091 0,090909091 0,090909091 0,090909091 0,090909091 0,315336293 0,315336293 0,315336293 0,315336293 0,315336293 0,315336293 3,841458821 3,841458821 3,841458821 3,841458821 3,841458821 3,841458821 Accept Accept Accept Accept Accept Accept 0,090909091 0,090909091 0,090909091 0,090909091 0,090909091 0,067939789 0,067939789 0,067939789 0,067939789 3,283020287 3,283020287 3,283020287 3,283020287 Accept Accept Accept Accept hi Conclusion ep 97,50% w lo Critical value 1/V 93% n ua al Conclusion pl Critical value yi Tuff (LR) u yj th 95% ad Conclusion 0,090909091 Tuff (LR) 0,067939789 0,067939789 Critical value 3,283020287 3,283020287 Accept Accept 1/V 0,090909091 0,090909091 0,090909091 0,090909091 0,090909091 0,090909091 Tuff (LR) 0,010386357 0,010386357 0,010386357 0,010386357 0,010386357 0,010386357 Critical value 2,705543454 2,705543454 2,705543454 2,705543454 2,705543454 2,705543454 Accept Accept Accept Accept Accept Accept n t n oi z z Conclusion m ll 90% fu Conclusion va 1/V vb j ht The results from the Tuff test are incredibly different from of the Kupiec- POF Test All the models at all level of confidence are accepted Besides, many accepted conclusions don’t really support effectively for the observed (1/V), even when the observed probability of the exceptions occurrence in the time V is different significantly from the suggested model’s failure rate (α), the test is still accepted Following Dowd (2005), this Tuff test may not work effectively on long timeframe because it only uses the time until first exception as an input factor And hence the longer the timeframe, the more exceptions occurrences after then we ignore, the less suitability of the first exceptions probability with the failure rate Thus this test may work more effectively on the short timeframe but in our case, it would not be suitable for VN-30 portfolio k m gm om l.c an Lu n va 4.3.3 Independence test y te re (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose 612 | Policies and Sustainable Economic Development Table t to ng Independence test’s results hi SMA- Independence Test ep n LR(ind) w 99% Monte Carlo Simulation Historical Simulation VarianceCovariance Monte Carlo Simulation #NUM! #NUM! #NUM! #NUM! #NUM! 0,153882338 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 ad Conclusion VarianceCovariance lo Critical value EWMA- Independence Test Historical Simulation Accept u yj th 97.5% 0,153882338 2,822118853 4,135493351 0,153882338 4,135493351 2,920802126 Critical value 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 5,023886187 Accept Accept Accept Accept Accept Accept n ua al 95% pl Conclusion yi LR(ind) 3,846893281 4,844749089 4,496366291 3,846893281 4,496366291 9,344330576 Critical value 3,841458821 3,841458821 3,841458821 3,841458821 3,841458821 3,841458821 Reject Reject Reject Reject Reject Reject LR(ind) 8,241998121 8,344533042 6,554636641 8,241998121 7,941979673 9,9872333 Critical value 3,283020287 3,283020287 3,283020287 3,283020287 3,283020287 3,283020287 Reject Reject Reject Reject Reject Reject LR(ind) 11,38740597 9,664159005 9,782766691 11,38740597 9,782766691 9,829641812 Critical value 2,705543454 2,705543454 2,705543454 2,705543454 2,705543454 2,705543454 Reject Reject Reject Reject Reject Reject m ll fu 93% 90% z z j ht vb Conclusion t n oi Conclusion n Conclusion va LR(ind) k m At the 99% confidence level, the value of P(1,1) = and hence we don’t need to the independence test For the remains confidence levels, there are just only the results generated from VAR models at 97.5% confidence level which would be accepted and the rests are all rejected in the independence test There is still one result of EWMA-MCS at 99% being accepted But in general, the most valid range of this test would lie at 97.5% confidence level gm om l.c n va The value of joint test would be the sum value of POF test and independence test And respectively, we have the results as follow: an Lu 4.3.4 Joint test y te re (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose Policies and Sustainable Economic Development | 613 Table 10 t to ng Joint test’s results hi SMA-Joint Test EWMA- Joint Test ep Historical Simulation VarianceCovariance Monte Carlo Simulation Historical Simulation VarianceCovariance Monte Carlo Simulation #NUM! #NUM! #NUM! #NUM! #NUM! 15,71478321 w 99% n LR(cc) 9,210340372 ad lo Critical value 97.5% 6,839944016 0,160376377 6,839944016 10,26747227 7,377758908 7,377758908 7,377758908 7,377758908 7,377758908 7,377758908 Accept Accept Accept Accept Accept Accept 4,912650287 4,525984685 3,876511674 4,525984685 9,700684519 95% n ua al Conclusion 4,006594147 pl Critical value Reject 0,160376377 yi LR(cc) No P(1.1), no independence test > use POF No P(1.1), no independence test > use POF u yj th Conclusion 3,876511674 Critical value 5,991464547 5,991464547 5,991464547 5,991464547 5,991464547 5,991464547 Accept Accept Accept Accept Accept Reject LR(cc) 8,503356453 12,05531057 8,176283831 8,503356453 9,252682673 10,24859163 Critical value 5,318520074 5,318520074 5,318520074 5,318520074 5,318520074 5,318520074 Reject Reject Reject Reject Reject Reject LR(cc) 11,39134989 16,82544427 14,73511649 11,39134989 15,24632802 11,09855491 Critical value 4,605170186 4,605170186 4,605170186 4,605170186 4,605170186 4,605170186 Reject Reject Reject Reject Reject Reject n z j ht vb k m Conclusion z 90% t n oi Conclusion m ll 93% fu Conclusion va LR(cc) gm The results of Table show acceptance range running from 95% to 97.5% confidence levels of all models, which indicate the VAR model results are satisfied both the suitable frequency and the accepted level of independence However, these joint tests results may raise some concerns because even if the results are accepted (or rejected), it may not be true that the models’ results are satisfied both at POF tests and independence test (are unsatisfied both at POF tests and independence test) The study of Katsenga (2013) and Campbell (2005) indicated that many of the past studies also have the same problem when it is possible for the model to pass the joint test but still violate either of POF test or independence test or may even pass those entire two tests but still violate the joint test And this is happening at the 95% and the EWMA-MCS at 97.5% in our study At the 95% confidence level, the join tests are accepted but the models still violate independence test For the EWMA- Monte Carlo simulation, joint test is accepted but the still rejecting the POF test at 97.5% confidence level We can explain this for some reasons When we not separate the joint test into POF and independence tests, we cannot know which test is accepted Typically, as the joint test works with chi square of degrees of freedom while POF and independence test work with chi square of degree om l.c an Lu n va y te re (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose 614 | Policies and Sustainable Economic Development t to of freedom, there are concerns as the critical value of degrees of freedom does not double the critical value of degree of freedom for 90%-99% confidence level: ng hi Either of the tests (POF or independence) would be violated but still pass the joint test This is due to the reason that one of the two test’s critical value is significant small compared to the relative critical value of degree of freedom and hence when the other critical value is greater the critical value by a little amount, the join test still lay out an accepted conclusion For example, at the 95% confidence level, if the POF’s ratio is 0.032, which are an acceptance and the independence test’s ratio is 3.94 which is a rejection, the sum of these two value, which is the join test, would be 3.972 and still be accepted ep w n ad lo u yj th yi The second case is that when both POF and independence tests are accepted but the relative joint test is rejected This could happen when both statistical ratio value of both test is merely below the relative critical value of degree of freedom For example, at 95% confidence level, if the statistical ratio value of POF is 3.2 and of the independence test is 3.5, which are all acceptances, but the sum of these tests, which is the join test, would be 6.7 and would be rejected pl n ua al va n Here is Table of chi-squared critical value of & degrees of freedom: 3,841458821 93% 3,283020287 90% 2,705543454 7,377758908 5,991464547 5,318520074 j ht 5,023886187 95% vb 97,50% 9,210340372 z 6,634896601 z 99% degree of freedom t degree of freedom n oi Critical value of Chi-square of 1&2 dof m ll fu Table 11 4,605170186 k m om l.c 4.4 Discussion gm Thus one test alone could not be so convincing to prove the validity of the models’ results And hence we should look at all back-tests to see the most accepted range for VAR models’ application an Lu Throughout all back-tests, excluding the Tuff test, we can see at the 97.5% confidence level, all three VAR models’ results from volatility-methods are positively supported and accepted by most back-tests including the POF tests, independence tests and join tests Thus, the 97.5% confidence level could be the most valid range of models’ application in VAR determination n va y te (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose re Among three models, each one has its own pros and cons and besides that, they all have similar accepted range in both types of tests And thus the power of these models would be hard to differentiate But in the context of market condition is not truly normal, historical simulation and Monte Carlo simulation is more preferable The use of model also depends on investors’ perspective and thus for my point of view, Monte Carlo simulation would be the most preferable due to its (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose Policies and Sustainable Economic Development | 615 t to flexibility in generating additional observations that capture the recent historical events and the ability to adjust the number of simulations to create data market distribution based on our view ng hi Conclusions ep Firstly, the study investigates and applies models to find the VAR amounts of VN-30 portfolio throughout the study timeframe to see the differences among the models’ results whether are significant And as the results, at the range close to 99% and 90% the differences become larger while the range of 93%, 95% and 97.5% the differences are small w n ad lo u yj th yi Secondly, two types of tests: Unconditional and Conditional coverage tests including totally four back-tests are conducted to examine the validity of the VAR models in the frequency consistency level and independence level But the Tuff test is not appropriate while the rest back-tests show the most valid range of application is at 97.5% confidence level Therefore, it is suggested that investors should find VAR at 97.5% confidence level to enhance the validity power of the models pl n ua al n va Thirdly, Monte Carlo simulation is the most preferable method suggested in the context of the market condition is not truly normal due to its flexibility in generating observations based on users’ viewpoint m ll fu t n oi Finally, the study provides an insight look into VAR and basic models application to VN-30 stock basket in Ho Chi Minh Stock Exchange to see the potential risk of loss that historical basket’s movements would likely present and the validity of VAR measurements based on the study assumptions Hence, it is suggested that the readers could investigate more other methods to develop their own optimal ones or extend the three models introduced to many other individual portfolios and stock exchanges like HNX, HNX-30… z z j ht vb k m References gm Alexander, C (2008) Market risk analysis (Vol : Quantitative Methods in Finance) John Wiley & Sons, England om l.c Allen, L., Boudoukh, J., & Sanders, A (2004) Understanding market, credit, and operational risk: The value at risk approach Blackwell Publishing, United States Angelovska, J (2013) Managing market risk with VaR (Value at Risk) Journal of Management, 18(2), 81-96 an Lu Anderson, R., Sweeney, J., & Williams, A (2011) Statistics for business and economics (11th Edition) South-Western Cengage Learning, United States Christofferssen, P., & Pelletier, P (2004) Backtesting value-at-risk: A duration based approach Journal of Empirical Finance, 2, 84-108 (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose y te Christofferssen, P (1998) Evaluating Interval forecasts International Economic Review, 39, 841-862 re Campbell, S (2005) A review of backtesting and backtesting procedure Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC n Bohdalova, M (2007) A comparison of value at risk methods for measurement of the financial risk Working Paper, Faculty of Management, Comenius University, Bratislava, Slovakia va Best, P (1998) Implementing value at risk John Wiley & Sons, England (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose (Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose(Luận.văn).applying.three.var.value.at.risk.approaches.in.measuring.market.risk.of.stock.portfolio.the.case.study.of.vn.30.stocks.basket.in.hose