Value-at-risk and conditional value-at-risk assessment and accuracy compliance in dynamic of Malaysian industries

Abstract

Risk management becomes increasingly crucial for financial institutions in competitive market today. Value-at-risk (VaR) and Conditional Value-at-risk (CVaR) methods have taken important places in risk management field as recognized by Basel Committee on Banking Supervision (BCBS, 2012). While VaR measures the maximum loss in a given confidence level and period, CVaR gauges the amount of loss exceeding VaR in a given confidence level. This study attempts to describe and compare VaR and CVaR methods within Malaysian industries using both parametric and non-parametric approaches. Moreover, researcher measures the accuracy of predicted VaR and CVaR by applying "Backtesting" technique. To this regards, results revealed that VaR always tends to underestimate the risk, while CVaR models tend to overestimate the risk in most of the cases. The results also indicated Technology industry with the highest risk, while Consumer Product industry had the lowest one. All in all, the choice of picking the right risk model is highly depend on the preference of institutions in Malaysia. © 2013 Asian Network for Scientific Information.