Computing Skills in the Market Risk Management in the G-Sec Portfolio by the Banks in India

Das, Rituparna (2009): Computing Skills in the Market Risk Management in the G-Sec Portfolio by the Banks in India.

Abstract

Market Risk Management Process in India is in an evolving process since the Banks in India are still in an early stage of development in the sense that they are lacking statistical database, equipped MIS and adequate supply of trained personnel. Many a good number of banks are suffering from breaches of VaR calculated following internal models. Further they are also finding difficulty in validation with small sizes of sample. Firstly in India the maximum traded security during the first quarter of 2008-09 is the 10 year benchmark G-Sec but the return figures on a security of 10 year maturity are not available since the particular benchmark security has no more a maturity of 10 years after a single day elapsed. The security market is very thin with unutilized arbitrage opportunities and absence of pricing of the characters like convexity. Secondly liquidity in Indian money and G-Sec markets is not sufficient to induce active trading in all instruments of all maturities such as to get an idea of yield movement in every maturity. Thirdly using discreet compounding and discounting is not appropriate in valuation. Fourthly asset returns in reality follow other distributions like beta and log-logistics where the simple and probability weighted measures of average and standard deviation are different and hence 99% VaR estimate is well above the estimate based on the assumption of Normal Distribution. Finally it is not mandatory in India to compute VaR but Duration does not provide risk measurement across the categories of assets and, hence, aggregation of risk for the entire trading book.

• Item Type: MPRA Paper
• Language: English
• Keywords: Value at Risk, Fixed Income, G-Sec, Modified Duration, Capital Charge, Vertical Disallowance, Horizontal Disallowance, Portfolio, Zero Coupon, Term Structure, Yield Curve, YTM, Nelson-Siegel, CCIL, RBI
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

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