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J. Risk Financial Manag. 2015, 8(1), 103-126; doi:10.3390/jrfm8010103

Quantification of VaR: A Note on VaR Valuation in the South African Equity Market

Department of Mathematics and Applied Mathematics, University of Pretoria, Pretoria, 0002, South Africa
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Academic Editor: Michael McAleer
Received: 30 September 2014 / Revised: 26 November 2014 / Accepted: 21 January 2015 / Published: 13 February 2015
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Abstract

The statistical distribution of financial returns plays a key role in evaluating Value-at-Risk using parametric methods. Traditionally, when evaluating parametric Value-at-Risk, the statistical distribution of the financial returns is assumed to be normally distributed. However, though simple to implement, the Normal distribution underestimates the kurtosis and skewness of the observed financial returns. This article focuses on the evaluation of the South African equity markets in a Value-at-Risk framework. Value-at-Risk is estimated on four equity stocks listed on the Johannesburg Stock Exchange, including the FTSE/JSE TOP40 index and the S & P 500 index. The statistical distribution of the financial returns is modelled using the Normal Inverse Gaussian and is compared to the financial returns modelled using the Normal, Skew t-distribution and Student t-distribution. We then estimate Value-at-Risk under the assumption that financial returns follow the Normal Inverse Gaussian, Normal, Skew t-distribution and Student t-distribution and backtesting was performed under each distribution assumption. The results of these distributions are compared and discussed. View Full-Text
Keywords: Value-at-Risk; Normal Inverse Gaussian (NIG); FTSE/JSE TOP40 index Value-at-Risk; Normal Inverse Gaussian (NIG); FTSE/JSE TOP40 index
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Mabitsela, L.; Maré, E.; Kufakunesu, R. Quantification of VaR: A Note on VaR Valuation in the South African Equity Market. J. Risk Financial Manag. 2015, 8, 103-126.

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