Sensitivity of Value at Risk estimation to NonNormality of returns and Market capitalization

Sinha, Pankaj and Agnihotri, Shalini (2014): Sensitivity of Value at Risk estimation to NonNormality of returns and Market capitalization.

Abstract

This paper investigates sensitivity of the VaR models when return series of stocks and stock indices are not normally distributed. It also studies the effect of market capitalization of stocks and stock indices on their Value at risk and Conditional VaR estimation. Three different market capitalized indices S&P BSE Sensex, BSE Mid cap and BSE Small cap indices have been considered for the recession and post-recession periods. It is observed that VaR violations are increasing with decreasing market capitalization in both the periods considered. The same effect is also observed on other different market capitalized stock portfolios. Further, we study the relationship of liquidity represented by volume traded of stocks and the market risk calculated by VaR of the firms. It confirms that the decrease in liquidity increases the value at risk of the firms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Non-normality, market capitalization, Value at risk (VaR), CVaR, GARCH
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

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