The comparison of Value at Risk (VaR) and Conditional Value at Risk (CVaR) model: The case of ASEAN-5

Abstract

This study is on comparing Value at Risk (VaR) and Conditional Value at Risk (CVaR) model, which include Normal Exponentially Weighted Moving Average and Historical Simulation to calculate the market risk of MSCI ASEAN-5 index. ASEAN-5 consists of Thailand, Indonesia, Malaysia, Singapore and Philippines. Investor are able to use Value at Risk (VaR) and Conditional Value at Risk (CVaR) as a tool to foresee the possible loss incurred due to return movement and adjust portfolio to be under an acceptable level of risk. The framework of Value at Risk (VaR) and Conditional Value at Risk (CVaR) model is calculating at 95% and 99% confidence level and also back-testing in which Violation Ratio and Three-zone Approach are applied.
Since Historical Simulation model is not assumed the return distribution in accordance with the return distribution of MSCI ASEAN-5 index which is not the normal distribution. The result shows that Historical Simulation model is more suitable to estimate Value at Risk (VaR) and Conditional Value at Risk (CVaR) of all countries of MSCI ASEAN-5 index than Normal Exponentially Weighted Moving Average model both 95% and 99% confidence level. Besides, the study finds that MSCI-Indonesia presents the highest estimated risk, where as it provides the highest return, therefore it is attractive to risk-loving investor.