Measuring the market risk for the selected ASEAN countries - A value at risk approach

MINISTRY OF EDUCATION & TRAINING

HO CHI MINH CITY OPEN UNIVERSITY

-----------------------------------------------

DANG TUONG THUAN

MEASURING THE MARKET RISK FOR THE

SELECTED ASEAN COUNTRIES:

A VALUE-AT-RISK APPROACH

THESIS OF MASTER OF FINANCE AND BANKING

HCMC – May 2018

MINISTRY OF EDUCATION & TRAINING

HO CHI MINH CITY OPEN UNIVERSITY

-----------------------------------------------

DANG TUONG THUAN

MEASURING THE MARKET RISK FOR THE

SELECTED ASEAN COUNTRIES:

A VALUE-AT-RISK APPROACH

Major: Finance and Banking

Major Code: 60 34 02 01

THESIS OF MASTER OF FINANCE AND BANKING

Academic Supervisor:

Dr. VO HONG DUC

i

DECLARATION

I hereby declare, that this thesis, “Measuring the market risk for the selected

ASEAN countries: A Value-at-Risk approach” is written and submitted by me

in fulfillment of the requirements for Master of Finance and Banking Program in

Ho Chi Minh City Open University. I further proclaim that this work is my original

result which is drawn on material collected by me. It has not been submitted for any

other subjects or equivalent course.

HCMC, May 2018

Dang Tuong Thuan

ii

ACKNOWLEDGEMENT

I would like to thank all those whose assistance proved to be a milestone in the

accomplishment of my end goal.

First and foremost, I would like to express a special appreciation to my academic

advisor – Dr. Vo Hong Duc, for his supports, guidance and patience. It is obviously

a privilege of mine.

I would like to thank my dear friends for their encouragements. Especially, I want

to give back a whole meaning of thank you to my fellow friend Pham Ngoc Thach

for his countless supports on along the writing process.

Finally, I would like to thank my family, my parents, sisters and brother, who are

always behind me unconditionally on the road I have been.

iii

ABSTRACT

One of the key concepts of risk measurements in financial and industrial sector

is the probability-based risk measurement method known as Value-at-Risk or VaR.

The results produced by a VaR model are simple for all levels of staff from all areas

of an organization to understand and appreciate. That is why VaR has been adopted

so rapidly. While VaR is an important issue for banks since its adoption as a primary

risk metric in the Basel Accords, there has been little investigation of industry based

VaR or CVaR metrics in to the author’s knowledge.

This study is designed to achieve two main objectives. First, determining and

measuring a relative level of market risk for each of the all industries of selected

countries, including Vietnam, Singapore, Malaysia and Thailand from 2007-2016.

Second, the estimates of Beta in CAPM are then compared with the relative level

of risk exhibited by key industries obtained from the VaR and CVaR techniques.

The findings are noticeable. First, by both historical and parametric VaR, finance

and real estate are ranked to be the highest risk industries in Vietnam throughout

the 10-year period. However, there are differences of industry risk rakings in other

countries, being Singapore, Thailand and Malaysia. Second, by CAPM, energy

businesses face a relatively higher risk in comparison with the market as the whole,

following by finance, material and estate. This result is somehow consistent with

VaR. However, the divergence is that the relatively rankings of Utility sector by

two method are completely opposite.

Keywords: Value at Risk, Conditional Value at Risk, industry risk, CAPM,

ASEAN

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“Research is formalized curiosity. It is poking and prying with a purpose.”

Zora Neale Hurston

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TABLE OF CONTENTS

DECLARATION .................................................................................................... i

ACKNOWLEDGEMENT .................................................................................... ii

ABSTRACT .......................................................................................................... iii

TABLE OF CONTENTS ...................................................................................... v

ABBREVIATIONS.............................................................................................. vii

LIST OF FIGURES............................................................................................ viii

LIST OF TABLES................................................................................................ ix

CHAPTER 1: INTRODUCTION ........................................................................ 1

1.1. Problem statement ...................................................................................... 1

1.2. Research objectives.................................................................................. 3

1.3. Research questions................................................................................... 3

1.4. Contribution of thesis .............................................................................. 4

1.5. Structure of thesis .................................................................................... 5

CHAPTER 2: LITERATURE REVIEW............................................................ 6

2.1. Theoretical ................................................................................................ 6

2.1.1. Risk: Definitions and classifications................................................ 6

2.1.2. Market risk measurements............................................................... 7

2.1.2.1. Value-at-Risk.................................................................................. 7

2.1.2.2. Conditional Value at Risk ........................................................... 19

2.1.2.3. CAPM ........................................................................................... 19

2.2. Empirical studies.................................................................................... 21

2.2.1. Value-at-Risk ................................................................................... 21

2.2.2. Conditional Value-at-Risk.............................................................. 23

vi

2.2.3. CAPM - Beta.................................................................................... 23

CHAPTER 3: RESEARCH METHODOLOGY AND DATA........................ 28

3.1. Data............................................................................................................. 28

3.2. Research methodology – the Models.................................................... 32

3.3. Hypothesis............................................................................................... 38

CHAPTER 4: RESEARCH RESULTS AND DICUSSION............................ 41

4.1. VaR and CVaR....................................................................................... 41

4.1.1. Vietnam ............................................................................................ 41

4.1.2. Malaysia – Singapore – Thailand .................................................. 49

4.1.3. Market risk by VaR and CVaR among countries........................ 52

4.1.4. Test results....................................................................................... 58

4.2. Beta estimation ....................................................................................... 60

4.3. Comparison in Vietnam ........................................................................ 64

CHAPTER 5: CONCLUSION AND IMPLICATIONS ................................. 67

5.1. Concluding remark................................................................................ 67

5.2. Implications ............................................................................................ 68

5.2.1. For Vietnamese government .......................................................... 68

5.2.2. For investors .................................................................................... 69

5.2.3. For academic purposes................................................................... 70

5.3. Limitations and further research ......................................................... 70

REFERENCES .................................................................................................... 71