engleski

Is historical simulation appropriate for measuring market risk?: A case of countries candidates for EU accession

Market risk represents the risk that the changes in market prices and rates will reduce the value of a security or a portfolio. The increase in the relative importance of market risk in banks’ portfolios has obliged banks and regulator, especially European Commission and Basle Committee for Banking Supervision, to continually discover new ways and investigate and probe the existing methods of measuring market risk. Research papers dealing with VaR calculation or volatility forecasting in the financial markets of EU member candidate states are extremely scarce. Since financial markets of the EU member candidate states significantly differ from the developed markets, one should question whether VaR models developed and tested in the developed and liquid financial markets apply to the volatile and shallow financial markets of EU member candidate states. The authors in this paper test whether using Historical simulation to measure Value at Risk is adequate for forming capital requirements in the banks that invest in the EU member candidate states. Stock market indexes of Bulgaria, Romania, Croatia and Turkey are used to test the Historical simulation as a VaR measure. The testing is performed out of the sample, and Historical simulation is tested with four different observation periods and at 95% and 99% confidence levels.

EU candidate states; market risk; value at risk; historical simulation; Kupiec test

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