Measuring the market risk for the selected asean countries a value at risk approach

MINISTRY OF EDUCATION & TRAINING HO CHI MINH CITY OPEN UNIVERSITY - DANG TUONG THUAN MEASURING THE MARKET RISK FOR THE SELECTED ASEAN COUNTRIES: A VALUE-AT-RISK APPROACH THESIS OF MASTER OF FINANCE AND BANKING HCMC – May 2018 MINISTRY OF EDUCATION & TRAINING HO CHI MINH CITY OPEN UNIVERSITY - DANG TUONG THUAN MEASURING THE MARKET RISK FOR THE SELECTED ASEAN COUNTRIES: A VALUE-AT-RISK APPROACH Major: Finance and Banking Major Code: 60 34 02 01 THESIS OF MASTER OF FINANCE AND BANKING Academic Supervisor: Dr VO HONG DUC DECLARATION I hereby declare, that this thesis, “Measuring the market risk for the selected ASEAN countries: A Value-at-Risk approach” is written and submitted by me in fulfillment of the requirements for Master of Finance and Banking Program in Ho Chi Minh City Open University I further proclaim that this work is my original result which is drawn on material collected by me It has not been submitted for any other subjects or equivalent course HCMC, May 2018 Dang Tuong Thuan i ACKNOWLEDGEMENT I would like to thank all those whose assistance proved to be a milestone in the accomplishment of my end goal First and foremost, I would like to express a special appreciation to my academic advisor – Dr Vo Hong Duc, for his supports, guidance and patience It is obviously a privilege of mine I would like to thank my dear friends for their encouragements Especially, I want to give back a whole meaning of thank you to my fellow friend Pham Ngoc Thach for his countless supports on along the writing process Finally, I would like to thank my family, my parents, sisters and brother, who are always behind me unconditionally on the road I have been ii ABSTRACT One of the key concepts of risk measurements in financial and industrial sector is the probability-based risk measurement method known as Value-at-Risk or VaR The results produced by a VaR model are simple for all levels of staff from all areas of an organization to understand and appreciate That is why VaR has been adopted so rapidly While VaR is an important issue for banks since its adoption as a primary risk metric in the Basel Accords, there has been little investigation of industry based VaR or CVaR metrics in to the author’s knowledge This study is designed to achieve two main objectives First, determining and measuring a relative level of market risk for each of the all industries of selected countries, including Vietnam, Singapore, Malaysia and Thailand from 2007-2016 Second, the estimates of Beta in CAPM are then compared with the relative level of risk exhibited by key industries obtained from the VaR and CVaR techniques The findings are noticeable First, by both historical and parametric VaR, finance and real estate are ranked to be the highest risk industries in Vietnam throughout the 10-year period However, there are differences of industry risk rakings in other countries, being Singapore, Thailand and Malaysia Second, by CAPM, energy businesses face a relatively higher risk in comparison with the market as the whole, following by finance, material and estate This result is somehow consistent with VaR However, the divergence is that the relatively rankings of Utility sector by two method are completely opposite Keywords: Value at Risk, Conditional Value at Risk, industry risk, CAPM, ASEAN iii “Research is formalized curiosity It is poking and prying with a purpose.” Zora Neale Hurston iv TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii TABLE OF CONTENTS v ABBREVIATIONS vii LIST OF FIGURES viii LIST OF TABLES ix CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Contribution of thesis 1.5 Structure of thesis CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical 2.1.1 Risk: Definitions and classifications 2.1.2 Market risk measurements 2.1.2.1 Value-at-Risk 2.1.2.2 Conditional Value at Risk 19 2.1.2.3 CAPM 19 2.2 Empirical studies 21 2.2.1 Value-at-Risk 21 2.2.2 Conditional Value-at-Risk 23 v 2.2.3 CAPM - Beta 23 CHAPTER 3: RESEARCH METHODOLOGY AND DATA 28 3.1 Data 28 3.2 Research methodology – the Models 32 3.3 Hypothesis 38 CHAPTER 4: RESEARCH RESULTS AND DICUSSION 41 4.1 VaR and CVaR 41 4.1.1 Vietnam 41 4.1.2 Malaysia – Singapore – Thailand 49 4.1.3 Market risk by VaR and CVaR among countries 52 4.1.4 Test results 58 4.2 Beta estimation 60 4.3 Comparison in Vietnam 64 CHAPTER 5: CONCLUSION AND IMPLICATIONS 67 5.1 Concluding remark 67 5.2 Implications 68 5.2.1 For Vietnamese government 68 5.2.2 For investors 69 5.2.3 For academic purposes 70 5.3 Limitations and further research 70 REFERENCES 71 vi ABBREVIATIONS AEC ASEAN Economic Community ASEAN Association of Southeast Asian Nations BCBS Basel Committee on Banking Supervision CAPM Capital Asset Pricing Model CVaR Conditional Value-at-Risk LAD Least Absolute Deviations OLS Ordinary Least Square VaR Value-at-Risk vii LIST OF FIGURES Figure 2.1 Three pillars of Basel II Figure 2.2 Distribution of daily return of QQQ (Variance – Covariance) 13 Figure 2.3 Distribution of daily return of QQQ (Historical) 14 Figure 2.4 Distribution of daily return of QQQ (Monte Carlo) 16 Figure 4.1 Historical VaR and CVaR in Vietnam (2007-2016) 44 Figure 4.2 VaR rankings shift in Vietnam 47 Figure 4.3 CVaR rankings shift in Vietnam 49 viii Table 17 Beta estimates Using CAPM (period 2010 – 2016) Period (2010-2016) Beta estimations in the post-GFC period LAD OLS Values Rankings Values Rankings Weighted-Cap Equally-Cap Weighted-Cap Equally-Cap Weighted-Cap Equally-Cap Weighted-Cap Equally-Cap Cons Disc 0.748 0.633 0.764 0.697 6 Cons Stap 0.650 0.585 7 0.716 0.627 7 Energy 1.143 0.961 1.179 0.991 Real Estate 1.031 1.096 1.044 1.093 Finance 0.383 0.337 0.451 0.373 Health -0.286 0.503 -0.593 0.560 Industry 0.707 0.698 0.815 0.739 5 Information 0.936 0.718 0.945 0.774 Materials 0.821 0.914 0.875 0.915 Utilities -0.382 -0.626 10 10 -0.703 -0.669 10 10 Note: Rankings are from 10 (lowest risk) to (highest risk) Source: Author’s calculation 63 As presented for the period of 2010 up to 2016, the estimates of equity beta using capital-weighted portfolios produce the significant higher values compared to those from the equally weighted portfolios On average, Energy and Real Estate are still ranked as the highest level of beta Otherwise, the average lowest betas estimates are observed from portfolio Utility, Health and Finance Besides, negative Utility betas show that the return of Utility would change in adverse trend with the market return 4.3 Comparison in Vietnam Below is the results obtained by CAPM (quantile regression) and historical VaR in order to compare whether risk level of Vietnamese industries are relatively consistent 64 Table 18 Comparison between Beta and VaR (period 2007-1016) Comparison between Beta and VaR in the GFC period and the post-GFC period In the GFC In the post-GFC Beta VaR Beta VaR Weighted-Cap Equally-Cap Diversified Undiversified Weighted-Cap Equally-Cap Diversified Undiversified Cons Disc 9 10 6 Cons Stap 8 10 Energy 1 2 Real Estate Finance 10 10 3 10 Health 10 10 10 Industry 7 Information 7 Materials 8 4 Utilities 6 Note: Rankings are from 10 (lowest risk) to (highest risk) Source: Author’s calculation 65 In the GFC period, both Beta and historical VAR attribute Consumer Discretionary to be one of the lowest risk businesses However, beside Consumer Discretionary, Beta shows that Finance is another low risky industry while this sector is ranked to be the high volatility industry by VaR On the other hand , Energy and Real Estate are generally classified into the highest risk industries In the years 2010 to 2016, CAPM and historical VaR show the similar results In details, under CAPM and VaR, Energy and Real Estate are the highest risk industries while Health and Consumer Staples are the low ones However, CAPM rates Utility as one of the lowest risk industries, whereas it is considered to be the highest volatility business by diversified historical VaR, and on average level of risk by undiversified method In the other hand, Finance is captured to be the average risk rankings by VaR, but Beta of CAPM takes this industry as low level of risk Apart from above contraries, Energy is almost ranked the highest risk industry by both CAPM and VaR meanwhile the “safest” industries attribute to Consumer Staples Therefore, two methods CAPM and VaR show that Energy is seem to be highest risk in the market during whole studying period According to Annual Report released in 2016 by Petro Vietnam Group, the main difficulties that industry facing are: The financial recession affected both business activities and the living standards Particularly, the significant increase in prices of essential goods, including the fuel materials made demand decrease, as a result The households tried to save the energy and/or change their resources Besides, new small and medium enterprises joined industry, which pushed market competition high The retail might face many challenges to spear to nationwide However, for the lowest industry, two methods produce the different results While CAPM votes Finance to be the bottom of rankings range, VaR imply this sectors to have high risk in the GFC period and change to be the “medium” risk sector after crisis Instead, VaR points that Consumer Discretionary, Consumer Staples and Health are relative “safe” for risk-avoided investors 66 CHAPTER 5: CONCLUSION AND IMPLICATIONS In this section, we will commence by summarizing the key results in order of the objectives of this study Then the implications and recommendations will be made 5.1 Concluding remark Vietnam is one of the best performing economies not only in Southeast Asian region but in the world over the last decades However, recent growth is driven by the rising importance of the private sector The role of the state sector in manufacturing activity has declined appreciably: from 52 percent in 1995 to under 35 percent in 2006, then 28 percent in 2015 But this has resulted more from the emergence of a vibrant private sector than from the dismantling of the state sector, which is being restructured and focused on more “strategic” activities Macroeconomic policies in Vietnam have been generally prudent and key economic balances have been maintained at manageable levels Besides, to heighten the potential competitive ability with the partnerships with any country around the world, it is time to determine the important role of sectorial risk, in particular, for key sectors (industries) relatively to similar sectors from others This study is conducted to measure the levels of the market risk, which has attracted great attention from academia, investment bankers, and policymakers, for 10 industries/sectors in Vietnam, Malaysia, Singapore and Thailand (selected countries in the ASEAN) There are two periods considered: (i) the GFC period (2007-2009); and (ii) the post-GFC period (2010-2016) The market risk level is measured using the historical approach and the parametric approach for both Value at Risk (VaR), the potential losses in the future over the given time period at a given confidential level, and Conditional Value at Risk (CVaR), which is designed to estimate the risk of extreme loss This section relates to two objectives given above Objective was to provide an measurement of VaR and CVaR in Vietnam and other three ASEAN countries Objective was to compare outcomes across models including VaR and CAPM, between diversified (weighted-capital) and non-diversified (equally capital) data A thorough analysis and measurement of industry VaR and CVaR has been undertaken in Vietnam from 2007 - 2016 The result is highlighted the importance 67 of using both short and long time frames in order to span different economic cycles as well as consider current conditions  First, the market risk level using VaR for Vietnam’s industries has witnessed a sharp reduction in the post-GFC period in comparison with the GFC period These findings highlight the reality that the market risk level may have reduced, there is no guarantee the ranking, representing how relative the marker risk level of the particular industry in comparison with other industries in the same market, to remain unchanged or improved However, CVaR has been substantially reduced across industries between the GFC period and the post GFC period, the ranking among industries appear to be stable  Second, findings from this study confirm that Vietnam’s sectors are relatively riskier than their counterparts in Malaysia, Singapore and Thailand The market risk level across sectors in these countries has substantially reduced in the post-GFC period It is found that the top risky quartile are Energy and Real Estate over time in Vietnam while Health and Consumer Discretionary are considered as the lowest risk sectors Consistently, it is generally showed that Energy remains the most volatility sector in Malaysia, Singapore and Thailand  Third, the market risk is measured by using Beta for various industries in Vietnam The empirical results from this study indicate that Energy has the highest ranking under both VaR result and Beta with other sectors of the Vietnamese economy whereas Consumer Staples is seem to be a “safe” sector in general 5.2 Implications On the ground of the above empirical findings, policy implications are then drawn for the Vietnamese government, investors and academics Each of these policy implications is discussed in turn below 5.2.1 For Vietnamese government In specific, in Vietnam, the highest risk industries are ranked for energy and real estate which are seem to be the very hot industries As a result, a range of directions and regulations in the process of privatization and equitization can be 68 imposed Energy is seemed to be the wildest vulnerable and high profitable industry Hence, it would be the most attractive to risk-oriented investors, resulting a high competitive industry to invest Therefore, the government should release regulation and instructions to guide energy’s firms as well as the investment policy to keep the stability of energy environment Similarly, real estate – other high risky sectors – are not only in knit-close relationship but also the bones in the economy Having the considerably high rankings, real estate is deserved to be driven by strict laws To take a short view in history of Vietnamese financial market, there are fluctuated periods in real estate and finance sectors The main aims of government’s involvement are to make the price to get close to the value, avoid the overestimate and even the balloons threats Generally, the state should manage to increase the quality of financial market transparency by applying the advanced management and public information, as follows:  widely and compulsory complementing International Financial Reporting Standards (IFRS) According to The World Bank’s Reports on the Observance of Standards and Codes (ROSC), it is revealed that financial statement of Vietnamese corporations has only been partially applied to IFRS (The World Bank, 2013);  enrich and complete the legal and compliance basis in Vietnam for enhancing the quality of public information and reports;  applying deserved punishments to the violations of the operating, accounting and reporting activities in public corporation The sanctions should have weights on preventing the breaches; 5.2.2 For investors The findings of this study provide the evidence to form the expectation relation to the risk level in Vietnam when the investment decision is made Estimates of risk level for each industry are now available from the results of this study Moreover, investors are also provided with guidance in terms of the relative rankings for various industries in ASEAN countries For example, the investment decision in Vietnamese companies operating in the Energy and Real Estate could ask for a higher expected returns because of the clearly relatively higher risky in comparison 69 with other industries in the market Taking everything into account, for pros and cons of each raking methods, decision belongs to each investor’s taste Last but not least, no matter it is individual or fund, all investors should equip a firm perspective of legal corridors as well as the business movements The prompt and prudent reactions to finance motions is one of the main success keys 5.2.3 For academic purposes The million-dollar question of which industry could suffer a bad loss and how much it costs are always complicated and apparently account for significant roles in the economy Therefore, they challenge the academia to figure out the ultimate answers In the developed economies such as the US, Australia and Europe, this topic does take a considerable attention of researchers In Vietnam, however, it seems likely a few studies on VaR have been attempted and the results may not relevant due to the shortage of academically arguments Indeed, should Vietnam research community take deserved empirical studies which are directly indicators to the economic development 5.3 Limitations and further research This study contains some limitations due to the capabilities of author as well as the information accessible ability However, that may become the opportunities for further research First, the key limitation found in this study is the availability of data For equity models, the publicly accessibility is the primary requirement Unless the researchers are able to reach the holistic data, these models are restricted Second, although some extreme advantages of CVaR are in awareness, CVaR results not play the leading roles in this study Therefore, further research could emphasize CVaR as a perfect alternative of VaR Third, researchers may conduct the similar works for various markets in order to obtain the fundamental point to make a holistic comparison Besides, other wideknown models, apart from conventional Beta, should be applied for estimating systematic risk They are 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Capital Accord, there are two methods to measure market risk: The Standardized Approach and the Internal Models Approach Operational Risk Operational risk is defined in the Basel II as the risk. .. obligation The following methods can be used to determine credit risk: The Standardized Approach, The Foundation Internal Rating Based Approach and the Advanced Rating Based Approach The Standardized Approach. .. misleading Yes Yes, except that Yes, except that value at risk estimates alternative when correlations/ standard of parameters may be recent past is atypical? alternative estimates deviations may