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Does Value at Risk provide an accurate and reliable measure of risk exposure, as a stand - alone risk management tool for a financial institution in periods of economic uncertainty?

Harvey, Declan (2011) Does Value at Risk provide an accurate and reliable measure of risk exposure, as a stand - alone risk management tool for a financial institution in periods of economic uncertainty? Masters thesis, National College of Ireland.

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Abstract

This dissertation seeks to investigate whether Value at Risk, as a stand - alone risk management tool, provides an accurate, credible and reliable measure of risk exposure for a financial institution in periods of economic uncertainty.

In order to achieve an answer to this question, I propose to create a hypothetical currency fund, with a portfolio value of €100,000,000 equally weighted over 10 major liquid currencies and invested 100% in cash and ascertain how the actual Evolving Rolling monthly VaR measure, calculated from daily pricing data over the 2005 -2008 period performed compared to the VaR estimates, during the period of September 2008 - September 2010.

The many disagreements surrounding previous research projects into VaR and the various approaches to modelling market risk, coupled with the numerous advantages/disadvantages of using a VaR model to estimate an adequate amount of capital to hold on reserve to cover estimated risk from normal operations, has lead me to the conclusion that a further research project into this area is justified.

Also, in the light of the recent financial crisis of 2008, risk management and prediction of market losses have begun to play a crucial role in the world of finance.

This thesis seeks to prove that, through analysing the actual fluctuations of the above mentioned currency fund against VaR estimates, over the period of 2008 - 2010, Value at Risk models do not provide a satisfactory stand alone risk measure and must be supplemented with stress testing.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions > Economic Recession
Divisions: School of Business > Master of Arts in Finance
Depositing User: Clair McAuley
Date Deposited: 16 Feb 2013 15:57
Last Modified: 17 Feb 2013 07:48
URI: http://trap.ncirl.ie/id/eprint/729

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