Original Research

Value at Risk in the South African equity market: a view from the tails

C Milwidsky, Eben Mare
South African Journal of Economic and Management Sciences | Vol 13, No 3 | a109 | DOI: https://doi.org/10.4102/sajems.v13i3.109 | © 2010 C Milwidsky, Eben Mare | This work is licensed under CC Attribution 4.0
Submitted: 10 September 2010 | Published: 10 September 2010

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C Milwidsky, University of Pretoria
Eben Mare, University of Pretoria, South Africa

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Traditional parametric Value at Risk (VaR) estimates assume normality in financial returns data.  However, it is well known that this distribution, while convenient and simple to implement, underestimates the kurtosis demonstrated in most financial returns.  Huisman, Koedijk and Pownall (1998) replace the normal distribution with the Student’s t distribution in modelling financial returns for calculation of VaR.  In this paper we extend their approach to the Monte Carlo simulation of VaR on both linear and non-linear instruments with application to the South African equity market.  We show, via backtesting, that the t-distribution produces superior results to the normal one.


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