Understanding Market Risk with VaR

Introduction:

During the last decades, financial organisations, as well as regulators, use Value-at-Risk (VaR) in terms of determining the market risk that is associated with any financial framework (Nieto & Ruiz, 2016). It is important for the marketing organisation to estimate the proper market risk to determine the overall success as well as sustainability of their company. Value-at-Risk (VaR) models highlight the fact that how can the value of a portfolio be decreased over period of time. There is another important risk management model which is termed as conditional VaR model which assist the financial regulators to estimate the proper loss in the assets. Financial organisation can use both the model in term of analysing the financial database which will assist the financial regulators to understand how things can go bad in the financial assets of the organisation. through using these two models, financial organisational can be able to regulate the intraday financial database4 which assist the marketers to understand the financial strength and drawback of their organisation. Through analysing the practical risk measures for any organisation these two a model assists the organisation to analyse how they are safe in the financial condition in terms of dealing with the international financial market. moreover, through using these two models it is able to recognise the loss and asset returns of a financial organisation. Through analysing the intraday portfolio, these two models assist marketers to understand the financial trend in the stock market which is important for operating proper transaction and financial functions.

The main difficulties arise in using these two models such as VaR and CVaR models in terms of estimating the financial assets while the portfolio has many assets. On the other hand, while the portfolio has single asset it there is no difficulties in using these two models in analysing the financial database of company. in this aspect, several financial databases suggest that through using the two models financial organisational can understand and estimate the single asset of a portfolio by analysing its financial records. On the other hand, while using several return series and assets in t portfolio, it is difficult for the regulators to determine the individual financial database for each asst and return (Engle and Lee, 1999). This is the reason, why today’s investors and the financial organisation focuses on using these two models only why they want to estimate single asset in the portfolio. In addition to this, these two models can be used in analysing the Pearson’s correlation coefficient, which is used in analysing linear relationship between assets. Through using Pearson's correlation coefficient, the VaR and CVaR model assumes the relationship of different assets is linear and independent of time. On the contrary several recent studies on the financial framework suggests that, that the relationship among assets in the financial framework is non-linear as well as they are time-varying. Moreover, the studies also suggest that relationship between the return distributions are asymmetric which are associated with the upside and downside movements.

Through using these models, it is possible for the financial organisation to deal with the economic slowdown in the market. through using these models, it is also possible to estimate the linear and non-linear relationship between the assets. The risk management framework is not only associated with identifying the relationship among the assets but also it is associated with arranging the tails of assets in the portfolio. Through using the Extreme Value Theory (EVT), the marketers are able to estimate as well as forecast ten risk. In recent studies, it has been suggested that both the VaR and EVT models are associated win estimating the financial risk in organisation, but it is difficult to understand which model is more useful forecasting the financial database. in this aspect it can be stated that through using VaR model financial regulators are although able to determine the risk in portfolio withy single assets, they are unable to determine the risk associated with many assets in one portfolio (Christoffersen et al., 2008, Deo et al., 2006, Tauchen, 2001). On the other hand, EVT model assists the financial regulators to not only estimate the risk in single assets but also in the many assets in portfolio. Therefore, recent studies prefer the EVT process in terms of analysing the financial database of an organisation to understand what are the possible risks and advantages in an organisation. Moreover, it can also be stated that, through using the EVT model, financial organisation will be able to analyse what type of risk management str4agies they will take in terms of dealing with the international financial market. generalized autoregressive conditional heteroscedasticity (GARCH) is associated with estimating the financial return in an organisation. in this aspect, the financial organisation needs to understand how the GARCH model will be applied in the financial framework of the organisation in term of dealing with the risk and financial crisis. Through using GARCH, it is possible for the marketers to understand the interrelation between the non-linear dependence and non-normal distribution through using proper procedure, it is possible for the financial organisation to use GARCH to analyse how much financial return would the company get in the annual term. Moreover, through using combines process of EVT and GARCH, it is also possible for marketers to analyse the assets and the return in joint venture. It can be stated that today's financial marketers use these processes in terms of understanding how many financial risks can attack the organisation. through using the EVT and GARCH model the marketers can easily understand the possible risk factors that are associated with the financial framework of the organisation through using the EVT process, marketers are able to analyse the return as well as combines assets in the financial framework. From the recent researches it can be stated that through using proper risk management process, organisation would be able to attend proper framework in term of analysing the financial condition of the organisation. important aspects that are associated with risk management models are determining the risk, dealing with the, by developing proper risk assessment strategy in terms of preventing these risks with using proper remedies.

In this aspect, it can be stated that risk management process is one of the most important processes that each financial institution needs to conduct in terms of analysing the current financial condition of that company. through using different models, the marketers of organisations are able to understand the risk that is associated with the organisation. Moreover, these models also assist the marketers to determine proper strategies in term of dealing with these risks. Several risk management models such as EVT, VaR and CVaR are used by organisations and financial institution in terms dealing with the financial crisis, in which the organisation use these models to analyse the annual financial database. these models also assist marketers to analyse the current assets and financial return of the company that assists marketers not only to understand their financial strength but also assist them to analyse their weakness, therefore, it can be stated that through using these models organisational would be able to understand their financial position in the domestic as well as international market which is important for enhancing the brand value and competitive advantage of the organisation.

This paper highlights the methodology that is associated with the construction of the EVT-GARCH-Copula framework. In addition to that, the paper also represents the clear understanding of portfolio analysis in terms of using effective risk management tools. It uses relevant resources in analysing the emporia data and report, which assist learner to understand the tools and process that are associated with risk management process. finally, it represents the implication of findings of the practical field.