Application of VaR in emerging markets: A case of selected Central and Eastern European Countries

Abstract

The possibility of market risk quantification in global recessive business conditions is especially significant in investment processes on emerging markets. Thus, in this paper, we investigate the relative performance of Value at Risk (VaR) methods with the daily returns series of four different emerging markets. The research covers the sample representing Slovenian (SBI20), Croatian (CROBEX), Serbian (BELEXline) and Hungarian (BUX) stock indices. The tested VaR methods are the Historical simulation (HS) and Delta normal VaR with rolling windows of 50, 100, 200 and 250 days. Subject of this research is to determine the possibility of application of the HS and Delta normal VaR with 95% and 99% confidence level in investment processes on the emerging markets of the selected Central and Eastern European countries. The applied methodology during the research includes analyses, synthesis and statistical/mathematical methods. The main goal of the research is to test the performance of the HS and Delta normal VaR with 95% and 99% confidence level estimates as functions of determining the maximum possible loss from investment activities on emerging markets. Research results indicate that methods shown to afford accurate VaR estimates in developed markets do not necessarily have application on the emerging markets.