Beyond Value at Risk for Developing Markets

Abstract

The standard metric for assessing risk in the financial realm has been the Value-at-Risk (VaR) with several parametric and non-parametric approaches and its derivatives which is Conditional Value-at-Risk (CVaR). The inability of VaR to tell loss severity beyond the confidence threshold and its incoherency gave birth to CVaR which accounted for both shortcomings and is also sub-additive. However, backtesting a 1-day CVaR model is almost impossible and VaR estimates gives better accuracy for fat tails than CVaR which makes CVaR also defective. Hence, there is need for a better measure which will capture the shortcomings of both metrics. This research will employ other risk measures beyond the conventional VaR and CVaR using the historical return of developing markets; South African Stock exchange (JTOPI-40) and the Nigerian Stock Exchange (NSE-30). In Particular, we will consider Hull-White Value-at-Risk (HWVaR) and Bubble Value-at-Risk (BVaR) and finally compare and contrast them with the two conventional metrics.