Gabriela Victoria Anghelache

Value at Risk Prediction: The Failure of RiskMetrics in Preventing Financial Crisis. Evidence from Romanian Capital Market☆

Abstract Financial markets are not perfect and the risk cannot be totally eliminated, thats why risk reduction became more and more important for the financial markets, since the 2008 financial crisis. The most commonly used tool for risk measure is Value at Risk, being considered a crucial milestone, because it shows the maximum loss in the value of a portfolio asset. The first comprehensive market risk management methodology was developed by JP Morgan in 1994, and was called RiskMetrics, which become extremely popular due to its easy implementation. This paper analyzes the capacity of RiskMetrics in forecasting the high volatility during the financial crisis for the financial Romanian market and to see if there is some differences regarding the value of decay factor estimated based on squared error loss, the RiskMetrics approach, and the values obtain from implementing the check error loss function in estimating the decay factors. We found that in the case of BET and BET-FI, the RiskMetrics estimations underestimate the decay factor, by attaching a lower weight to the most recent variance. Moreover, we proved that RiskMetrics model was good enough to forecast the volatility on Romanian financial market during the financial crisis period, only if we estimate the decay factor based on check error loss function.

Regression Models Applied in the Analysis of the Romanian Capital Market

Abstract The analysis of the activity of the Bucharest Stock Exchange can be realized with the help of a complex system of indexes. Out of these, an especially important role in the creation of a real image on the performances of the main stock exchange institution of Romania is held by the BET (Bucharest Exchange Trading) index. One of the factors with significant influence on the value of BET is the stock exchange capitalization. This is an indicator on the potential of a stock exchange which reflects the market value of listed companies and can be determined as sum of the product between the number of shares issued by each listed entity and its corresponding market price. This paper describes the analysis of a data series (daily frequency) regarding the value of BET index and stock exchange capitalization in 2012. The 250 terms of the series subjected to econometric analysis are collected from official sources.