Risk Evaluation And Analysis Of VaR In China's Warrant Market

Risk management in appropriate model is one of the hottest topics in the fields of financial research. Value-at-Risk(VaR)is one of the most commonly used tools for risk management. Amendment to the Capital Accord to Incorporate Market Risks (Base Committee on Banking Supervision, January 1996) requires that banks use VaR as minimum standard for the purpose of calculating their capital charge in relation to market risk. Volatility is one of the crucial inputs when using variance-covariance method, which is one of the commonly used methods for estimating VaR.With the fast development of China's warrant market, this paper analyzes the status of China's warrant market and explains the character of the market risk.this paper introduce the development of China's warrant market,analyze the potential risk, then introduce the research method and utilizes the sample to do an empirical research at last. Accoring to the research interval from Aug22, 2005 to May31, 2008, this paper selects 19 warrants in China for study, including 12 call warrants and 7 pue warrant.This paper considers three alternative volatility estimation approaches in analysis method to find an appropriate VaR model, which includes historical volatility, GARCH volatility and implied volatility. Then this article chooses the back testing methods put forward by Kupiec to check up the result. The results show that:the average VaR of call warrants are higher than put wanrats under different volatility;the VaR model with GARCH volatility demonstrates the best performance in forcasting the market risk; the warrant writer can reduce the losing through issue call and put warrant underlying the same stock.So we advise people to select the GARCH volatility in 99% confidence level to forecast the risk of warrant market.We propose the policy advices combine the status and the present problem.