Study Of "VaR" As A Portfolio Risk Measuring Tool And Portfolio Optimization Theory

Financial risk management is a huge field with diverse and evolving components,as evidenced by both its historical development and current best practice.One such component-probably the key component-is risk measurement,in particular the measurement of financial return volatilities and correlation.Asset-return volatilities are dynamic and varying in different periods.This is constant among assets,portfolios,time periods,and countries,as explicitly brought to the critical situation during numerous crisis events,most recently and prominently the 2008 financial crisis and its far-lasting consequences.The field of financial econometrics devotes considerable attention to dynamically varying volatility and associated tools for its measurement,modeling and forecasting.Value-at-Risk is one of the portfolio risk measurements used by many financial institutions in the world,and the milestones for it started in the middle of last century.Many scholars gave the first study of Value-at-Risk in their works.Although in modern era,many financial institutions try to make their own methods and tools of financial risk measures,durnng the financial crisis in 2007-2008,many financial institutions suffered huge amount of money,while Goldman Sachs not only did not bear losses,but also made a profit.This proves the fact that how risk measuring tools could be a useful weapon during financial shocks as that was in 2008.In the research the author tries to analyze VaR,modern risk measurement,and find implementation ways in Uzbekistan.Besides,in the paper there given an example of portfolio optimization tool as a continuation of research.In the thesis,there described three main approaches of Value-at-Risk measure:Variance-Covariance approach,Historical Simulation and Monte Carlo Simulation.For analysis the fictional portfolio is going to mirror the set of shares of 10 companies from DJIA Index,in order to assess whether the model is able to predict losses in different situations and point of times on the market and how well.Moreover,the findings for Value-at-Risk are to be analyzed through a law perspective of the bank accord Basel III.All approaches are conducted for 3 periods,the period until the beginning of the Financial Crisis,the period covering the beginning of the Financial Crisis and the period until a year after Financial Crisis.The different scenarios aim to challenge all 3 methods and "test" its reliability.After the calculation the result shows that Historical Simulation method gives the highest level of risk,and comparing with real losses of the fictional portfolio,there are 8 moments that we fail to predict.Using requirements of Basel Ⅲ,the results are the same with Historical Simulation approach.Portfolio Optimization helps to reallocate the stocks in portfolio,and we attempt to predict more losses,MVO theory gives beneficial results.We succeed in decreasing the number of actual portfolio losses higher than calculated Value-at-Risk up to over two times.While implementing 10-day Basel Ⅲrequirement,we get more clear result,fails are 3 points.The reason why VaR could not sense the losses is nonfinancial factors,which should be taken into consideration by financial manager of a company,such as a better understanding of risk by the management,political movements,or increasing the transparency on the capital requirements that will furthermore promote discipline and stability on the market.In terms of the Value-at-Risk implementation in Uzbekistan,we can scrutinize the spheres where Value-at-Risk can be utilized,such as banking system,insurance sector.As the country is trying to go international,the financial risk management should be based on foreign experience,so VaR helps to make it more accurate and clear.The thesis describes a statistical tool,Value-at-Risk,which used to measure and quantify the level of financial risk of investment portfolio over a specific period.Through our research we attempt to analyze the biggest financial crash of entire century using modern methods of risk management,and try to implement portfolio optimization.Moreover,we suppose that this methodology is one of the tools,which are going to be used every single day by local companies in the near future,as Uzbekistan is becoming more attractive for investors that gives effect to utilization of world standards and requirements in national financial system.