Volatility Modelling in Parametric Value at Risk Calculation: An Application on Pension Funds in Turkey

Abstract

Risk management has strategic importance with deepness and globalization of financial markets. Financial markets are faced with systematic or non-systematic risk factors. Risk management has a great importance for banks, as well as other financial institutions and investors.In this context, "Value at Risk (VaR)" is recommended as one of the methods to measure market risk by international organizations and Turkish Banking Regulation and Supervision Agency (BRSA). The parametric method (Variance-Covariance Method), one of the methods used in VaR calculation, used in pension funds which have reached large numbers and established by the Turkish pension companies. Moreover, this method is applied in two different ways based on the assumption of constant variance and based on the basis of conditional heteroscedasticity, and the results were compared. The accuracy of the calculations have been tested by backtesting method. For this purpose, daily returns company's growth equity fund between 03/01/2011 - 04/30/2013 is used for the four pension companies which is the maximum size of the fund and operating in Turkey.