Measuring Market Risk - Reserve Bank of India

MEASURING MARKET RISK 19
where L t
denotes a score at time t, Loss t
is the magnitude/amount of
loss at time t and VaR t|t-1
is the estimated value-at-risk made for time
t made at time (t-1).
The overall score (i.e. value of the loss-function) is the
summation of all scores (L t
) over all back testing days. A VaR
model which gives minimum overall score is preferred over other
competing models.
In the spirit of Lopez (1998), Sarma et al. (2003) consider two
loss-functions, viz., regulatory loss function and the firm’s loss
function, which assign scores on t-th backtesting day as follows;
Regulatory Loss Function
Firm’s Loss Function
..... (10)
..... (11)
where α represents the opportunity cost of capital and meaning of
other symbols and variables are as above.
Empirical Results
5.1 Data
Section V
Data availability in government securities to carry out value-atrisk
analy sis is quite difficult. This is simply because the government
securities market is still not vibrant, deep and liquid enough.
Securities keep on changing their tradability making it difficult to
get time series trade data on a particular security for more than, say,
three years. One can easily verify that though there are more than
ninety outstanding government securities, less than ten securities are
traded for good volume or number of trade. Among these, of course,
all are not regularly traded. We could get data for three years from