Estimating Risk Market Using the VaR and CAPM Beta

Abstract

The aim of this paper is to measure the market risk of Mexican financial asset portfolios under high volatility periods with four methodologies: 1) the Beta of the Capital Asset Pricing Model (β-CAPM), 2) the Value at Risk-Historic Simulation (VaR-SH), 3) the VaR-Normal Delta (VaR-δN), and the VaR-Montecarlo Simulation (VaR-SM). These methodologies were elected by being parsimonious. Results show that these methodologies are consistent in high volatility periods. Calculating the market portfolio composition and its VaR, for comparability ends, it is an expected recommendation. The main disadvantage is that the β-CAPM can only be estimated for asset portfolios, while the proposed methodologies of VaR do not consider the occurrence of extreme events. This imply that risk levels could be underestimated in high volatility periods. The contribution of this paper relies upon the comparison of the proposed methodologies through the estimation of the market portfolio. Though these methodologies are significatively consistent in high volatility periods, VaR-SH estimates higher risks than that calculated with β-CAPM, before the high volatility period are evident, even though the estimated β-CAPM risk is consistent otherwise.