Quality of market risk prediction based on the VN-Index

Abstract

In Vietnam, the stock maket has been experiencing tremendous volatility during the last few years. Therefore, stock prices as well as the VN-Index have been very volatile in this respect; for instance, the VN-Index surged forward to meet the record level of 1,200 points in 2007, but it suddenly plunged to around the 310-point level one year later (2008) and continually fell to its lowest level in 5 years at 235 points in the beginning of the year 2009; after that, it rose slightly and stayed around at the average number of 486 points during 2010. These trends, particularly downward trends, make the investment in financial assets in Vietnam extremely risky. The volatility of capital markets has stimulated researchers and practitioners to propose and develop proper risk management models. Value at Risk-based risk management has become an increasingly important topic, and received  signicant attention in the last decade. On the basis of applying VaR-related methodologies to the VN-Index portfolio, the paper finds that Non-Parametric VaR model did not perform effectively during three axamined periods. In contrast, Parametric VaR models, especially GARCH model forecasted accurately the loss of the portfolio. Therefore, it is appreciably recommended that investors should place much emphasis on GARCH model in order to make effective decisions about capital allocation or withdrawal to optimise their portfolio value./,