Value-at-Risk Estimation and Backtesting Through Crises: Market Risk in the Indian Context

Rawat, Arnav Singh

doi:https://doi.org/10.55041/ijsmt.v2i11.006

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VALUE-AT-RISK ESTIMATION AND BACKTESTING THROUGH CRISES: MARKET RISK IN THE INDIAN CONTEXT

AUTHORS:

Arnav Singh Rawat

Mentor

Affiliation

Anil Surendra Modi School of Commerce, SVKM’s NMIMS Deemed-to-be University, Mumbai, India

DOI: 10.55041/ijsmt.v2i11.006

CC BY 4.0 License:

This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Abstract

Value-at-Risk (VaR) sets trading limits, capital and exchange margins, and its accuracy matters most in a crisis. This paper reviews three empirical studies of VaR in Indian markets, covering the NIFTY 50 [1], government securities [2] and the S&P CNX 500 and INR/USD [3], and re-examines their published results. Recomputing the Kupiec statistics shows that Samanta et al. report χ²(2) tail probabilities for a χ²(1) test; corrected, simple historical simulation (HS) on 8.07% GS 2017 is rejected at 5% (p = 0.0234), although the tail-index model still ranks first. Sharma’s average annual penalties rest on an unstated rule that charges every yellow-zone year 0.625, and two of her equity averages break it. Re-estimating VaR in real time on NIFTY 50 data for 23 March 2020, when the index fell 12.98%, shows that the day’s loss was 4.21, 2.59 and 1.66 times the normal, HS and EWMA one-day 99% VaR. Over January 2020 to October 2021 (457 days), only a max(HS, EWMA) hybrid passed Kupiec’s test (p = 0.0659), and it stayed in the Basel yellow zone. The studies agree that returns are fat-tailed and that normal VaR understates risk at 99%, but none of the models came close to the size of the crash. With the RBI moving commercial banks to the Simplified Standardised Approach from 1 April 2027, the findings bear most on internal limits and exchange margining, where models should be validated over a stress period with duration or multi-lag independence tests as well as exception counts.

Keywords

Value-at-Risk; backtesting; Kupiec test; COVID-19; Basel traffic light; Indian financial markets

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This article has undergone plagiarism screening and double-blind peer review. Editorial policies have been followed. Authors retain copyright under CC BY-NC 4.0 license. The research complies with ethical standards and institutional guidelines.

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