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Title: Applied Value at Risk for Risk Management of Investment Assets
Authors: Doan Van Dinh
Aff: College of Economics & Trade, Hunan University, Changsha, Hunan, China and Faculty of Finance & Banking, Ho Chi Minh City University of Industry, Vietnam.
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Keywords: VaR Model; Value at Risk; Investment Assets Portfolio; Risk Management
Abstract:Value at risk (VaR) is the evaluation of financial risk through the application of methods of mathematics and probability & statistics. The VaR model is applied to many different purposes and depends on the users. Results of the VaR model help managers and investors to accurately assess and analyze the financial risk level. This article mainly researches on application of the VaR - Historical data model to assess the loss of the long-term investment asset portfolio with a defined confidence level. These research results indicate the loss level of long-term investment assets when this asset value is affected by fluctuation of market value and interest rate. The VaR is used as an evaluation target of the probable loss possibility. So, the selection of evaluation period depends on the enterprise’s characteristic portfolio as the Commercial Banks may choose the evaluation period that is one day, one week or one month because of high demands on the liquidity of the portfolio. In contrast, the investment funds can choose a longer evaluation period, usually over one month because the investment funds generally focus on lower illiquid assets such as long-term securities. Besides, the VaR is also used as an evaluation target of income analysis. The results of VaR analysis helps financial institutions get ability to forecast the probable financial loss. Therefore, the selection of confidence level parameter and evaluation period is very important. When the VaR is used for the purpose of establishing capital safety, they must ensure that the VaR can indicate the different types of risks such as credit risk, market risk, liquidity risk and risk activities. Hence, the choice of the confidence level of 95%, 99%, and 99.99% is to reflect the enterprise's prudent level for the financial risk. If the confidence level is higher, the financial risk is greater, i.e. the enterprise has good business strategies to deal with the risk that may occur.