A GARCH-VaR Investigation on the Brazilian Sectoral Stock Indices

Abstract

In this paper, we have explored operational risk in Brazil by considering different sectoral indices of the Brazilian economy and the GACH Value-at-Risk (GARCH-VaR) estimation approach. We have carried a statistical evaluation of the eight Brazilian sectoral stock indices during different time ranges so that VaR methodologies could be chosen according to the data. We have analyzed the sectoral Brazilian indices during a common time range where we have realized VaR backtests using recent data. The results of the study reveals that VaR may be an effective tool on minimizing risk exposure and potentially to avoid losses when trading in the Brazilian stock market. Furthermore, we have showed that different sectors of the Brazilian economy have significantly different risk behavior. In particular, the consumption and industrial sectoral indices presented the best risk performance. In this sense, we highlight that this type of analysis would be useful to small lenders/investors in evaluating the attractiveness of lending/investing on the Brazilian stock market.