Relook at the VaR Computation Method Recommended by National Stock Exchange of India

This paper addresses the question of whether the VaR estimation technique, originally prescribed by Riskmetrics and recommended after adaptation by the NSE, adequate enough to estimate VaR in the changing Indian market scenario, especially during the past one year when the markets exhibited considerable activity. This study describes the empirical investigation carried out centered on computing and backtesting VaR estimates of several indices designed by the NSE and Sensex values using recommended Exponentially Weighted Moving Average (EWMA) method and the dynamic volatility model based on GARCH. The results indicate that the GARCH-based VaR estimation method outperforms the officially recommended EWMA method; hence, the study advocates re-examination of the recommended method by appropriate bodies.