Hull-White’s value at risk model: case study of Baltic equities market

Abstract

Analysis of the applicability of the Hull and White (FHS) model on the Baltic equities market has not been the subject of significant research, especially not in the context of meeting the Basel Committee backtesting rules. The paper discusses the applicability of different variants of this model, in order to answer the question whether any variants (and which of them) of the model can be used in these markets in the context of the Basel II and III standards. The survey results show that 1) there isn't an optimal variant of this model, but that risk managers have to keep in mind stylized facts of financial returns when they specify the FHS model; 2) according to different criteria of the validity of the model (Basel II and III standards) different variants of models are differently ranked, which suggests that selection of a suitable model implies the use of a large number of different criteria, the model validity and loss function, especially those who take care of the size of tail loss and ES.

Keywords:

• value at risk
• historical simulation
• Hull-White model
• volatility
• GARCH
• emerging markets
• market risk

JEL Classification:

• G24
• C22
• C52
• C53

Additional information

Notes on contributors

Nikola Radivojević

Nikola RADIVOJEVIC. PhD, is currently a College Professor and Dean of Technical College at Applied Studies from Kragujevac, Serbia. He is the author and co-author of a large number of papers published in many international journals, and is a reviewer for several national and international journals, such as, Estudios de Economía Journal, University of Santago de Chile, etc. His research interests are Financial Management, Financial Risk Management, Banking Risk Management and Investment.

Nikola V. Ćurčić

Nikola V. CURCIC. PhD, is an Assistant Professor at the Faculty of Management, University Union-Nikola Tesla in Belgrade, Serbia. Research interests: Financial Management, Management of market share, Competitiveness of the company.

Djurdjica Dj. Vukajlović

Djurdjica Dj. VUKAJLOVIC. PhD, is Associate Professor at the Faculty of Applied Management, Economics and Finance, University Business Academy in Novi Sad, Serbia. Research interests: Risk Management, Economics, Marketing, Entrepreneurship.