COMPARISON OF VALUE AT RISK METHODS: APPLICATION OF ISE 30

Abstract

Purpose- The main purpose of this paper is to measure the potential losses of the portfolio obtained from ISE-30 using three different methods with VaR methods.

Methodology- Historical Simulation, Variance-Covariance Method and Monte Carlo Simulation are used for the calculation of VaR. These three methods are examined regarding their results on the portfolios created according to different criteria. The price series of ISE 30 are used to create different three portfolios and their VaR results are compared. The performance of VaR results are checked by backtesting process after calculating VaR. VaR results are discussed by examining the performance of the methods for each portfolio.

Findings- When the VaR of the portfolios are examined, the lowest VaR result of three portfolios is obtained in Portfolio 2 which is formed according to volatility criterion. One of the remarkable results of this study is that, as mentioned above, V-C and MCS methods give similar results. On the other hand, VaR results of the Historical Simulation Method are higher, and emerge in the green area in test process.  Conclusion- It may be advisable for banks or other investors in the financial sector to move to the top of the order of preference according to the retrospective test results of TS method under high confidence level conditions. On the other hand, the results of the V-K and MCS method should be tested with the Backtesting by extending the observation period. 

Keywords

• Value at Risk,historical simulation method,variance-covariance (parametric) method,Monte Carlo simulation method,ISE 30

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