Value at Risk in the South African equity market: a view from the tails

C Milwidsky, Eben Mare

Abstract





Traditional parametric Value at Risk (VaR) estimates assume normality in financial returns data.  However, it is well known that this distribution, while convenient and simple to implement, underestimates the kurtosis demonstrated in most financial returns.  Huisman, Koedijk and Pownall (1998) replace the normal distribution with the Student’s t distribution in modelling financial returns for calculation of VaR.  In this paper we extend their approach to the Monte Carlo simulation of VaR on both linear and non-linear instruments with application to the South African equity market.  We show, via backtesting, that the t-distribution produces superior results to the normal one.




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DOI: http://dx.doi.org/10.4102/sajems.v13i3.109

Submitted: 10 September 2010
Published: 10 September 2010


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South African Journal of Economic and Management Sciences    |    ISSN: 1015-8812 (PRINT)    |    ISSN: 2222-3436 (ONLINE)