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The IUP Journal of Applied Economics
Equity Risk Exposure: A Case of Indian Banking Industry
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Global market integration and increase in trading activities have magnified the financial system complexities and increased the degree of riskiness. Value-at-Risk (VaR) has been universally accepted as a measure of market risk in financial institutions. In this study, using the data of NSE-Nifty Bank Index and indices of SBI and ICICI Bank over a sample period from January 3, 2005 to November 19, 2014, an attempt has been made to analyze the market exposure in Indian banking industry by employing various methods of VaR. The study reveals that there is greater market turbulence during the financial crisis period than the pre- and post-crisis periods through all the three techniques of VaR. Moreover, bifurcating the full sample into three sub-samples (pre-crisis, crisis and post-crisis periods) seems to assure robustness, thereby validating the applicability of VaR methods for the Indian banking sector. Further, backtesting through Kupiec test revealed that historical simulation approach accounts for less statistical noise than other methods of estimating VaR..

 
 
 

Financial institutions have always been imperative for stimulating investment and other financial developments of an economy. Over the past two decades, the financial system has become more complex due to increase in trading activities, which in turn led to increase in the degree of riskiness. Indulging in more financial activity other than lending and depositing of money, although may be more beneficial, at the same time makes them more prone to market turbulences, resulting in high degree of risk in their daily trading activity. Therefore, with increasing complexities and turbulence in the financial system, the risk management becomes the most crucial strategic activity in any financial firm. In the recent past, major financial and non-financial corporations experienced insolvency as evidenced by the insolvency of many financial and non-financial corporations like Lehman Brothers, Washington Mutual, Royal Bank of Scotland, WorldCom, General Motor, and CIT due to the global financial crisis of 2008. All these bankruptcies and market turbulences in the world economy also bear significant impact on Indian economy and particularly on the financial and banking sector.

 
 
 

Applied Economics Jouranl,Global market integration,Increase in trading activities, Financial system complexities , Value-at-Risk (VaR), Applicability of VaR methods.