Var Risk Management Model, The Theory And Application

As an integrated risk-measuring approach, the VaR Risk Management Model is in accord with the new trend of risk management development. In recent years, VaR Risk Management Model has been generally accepted by the main commercial banks, investment banks, fund management companies and the institutions of the financial supervision. Today, this model has become the most popular risk-measuring approach in the world. Starting from the fundmental principle of the VaR Risk Management Model, this paper firstly constructed a portfolio management framework which is based on this model, and analyzed three functions of this model in the framework: asset allocation, risk management and performance valuation. Then, this paper empirically tested the validation and predictive accuracy of different VaR Risk Management Model in the domestic financial market.Finally,with the analysis of modem financial risk management development trend and the current domestic financial risk management situation, this paper made a prospect for the application of this model in the construction of domestic financial risk management system.Through the analysis, the main conclusions are as follows:(l)The traditional Mean-Variance Model is the special example of the portfolio selection based on the VaR Risk Management Model for the case that the returns of the portfolio are assumed to be normally distributed; Compared with the Mean-Variance Model ,the VaR Risk Management Model is more comprehensive and accurate in the measurement of the portfolio risk, so based on the VaR Model, the investors can allocate the asset more effectively. (2)The VaR Risk Management Model can provide the timely and comprehensive risk information for the top risk manager, so it is very helpful to the improvement of total risk management efficiency.(3)Based on the VaR Model, the RAROC performance valuation approach can reflect the real performance of the portfolio manager and provide the coherent standard for the allocation of risk limitation and the construction of the incentive compatibilityconstraint mechanism in the financial instiutions. (4)The normal distribution assumption of the domestic financial asset return is evidently incorrect. There are too many unacceptable biases in the Variance-Covariance Model's prediction of future risk. Because under the assumption of normal distribution, the Variance-Covariance Model has the same selection of portfolio as the Mean-Variance Model, so the prediction of the Mean-Variance Model has the same biases, however the semi-parameter VaR Model could give a better prediction. (5) The VaR Risk Management Model is complying with the new trend of the financial risk management development. Based on the VaR Model, constructing the risk-limitition internal control system, risk information disclosure system, performance valuation system and strengthening the financial supervision will help the technology of domestic financial risk management to catch up with the world's level.