Value at Risk (VaR) Methodology: An Analysis of Indian Banking Scenario

-- Biswajit Patra

Value at Risk (VaR) is a new technology in financial engineering which helps to measure the risk in the financial world. It can be defined as the maximum possible loss associated with a financial instrument within a given period of time and with a given confidence level. This VaR methodology became very much popular after the formation of the Basel Committee on Banking Supervision in 1995. This paper analyzes the different methods of VaR calculation, and empirically tests it in the context of Indian banking sector. It studies the historical data of Indian banking sector and looks into the structural breaks found in the industry. In all, the paper divides the entire study period, i.e., 2003-2011, into four structural shifts and looks into the risk attached to each time period. It shows that calculated risk in different time periods validates the economic scenario prevalent during that period. It also suggests the best methodology for VaR calculation in different time periods.

© 2012 IUP. All Rights Reserved.

The Impact of Size on Credit Risk Management Strategies in Commercial Banks: Empirical Evidence from India

-- Anju Arora

In recent times, Credit Risk Management (CRM) has come under increasing scrutiny in both academia and practice. It is commonly believed that CRM strategies followed vary with bank-specific characteristics. However, a study focusing on examining the association between size of the bank and CRM strategies in India does not seem to have been attempted so far. Drawing upon primary data of 35 Indian commercial banks during 2007-2008, this study aims to explore the extent to which bank size impacts on the choice of a broad set of CRM strategies relating to four elements of CRM, namely, (1) CRM organization; (2) CRM policy; (3) CRM operations and systems at transaction level; and (4) CRM operations and systems at portfolio level. For this purpose, sample banks were classified on the basis of their value of advances portfolio into three size categories, namely, small, medium and large banks. The findings obtained using discriminate analysis together with chi-square test suggested significant association between the size of bank and some of the CRM strategies, particularly with regard to CRM organization and CRM operations and systems at transaction level. It was concluded that large-sized banks generally emphasized the elements of specialization and centralization in the choice of their CRM strategies. The findings also indicated that a mix of the credit risk avoidance, credit risk mitigation and credit risk control approach was commonly followed by all the sample banks, irrespective of their size.

© 2012 IUP. All Rights Reserved.

Data Frequency and Dependence Structure in Stock Markets

-- Fernando F Moreira

It has been shown that the univariate distributions and other properties of asset returns are sensitive to the data frequency, but the effects of the data frequency on the dependence among returns have hardly been explored. The paper seeks to fill this gap by analyzing the impact of frequency changes on the dependence structure across the returns of 100 highly-traded American stocks and the market return over the period 2000-2010. It shows that in some cases, the association between stock returns and the market return changes according to the data frequency and, in general, investments based on monthly trades tend to be more conservative than investments made on a daily basis.

© 2012 IUP. All Rights Reserved.

An Analysis of Risk-Adjusted Return on Tax-Saving Mutual Fund Schemes in India

-- N S Santhi and K Balanaga Gurunathan

In this paper, an attempt has been made to evaluate the performance of 32 growth-oriented openended Equity Linked Savings Schemes (ELSS) of tax-saving mutual funds in India. Performance has been analyzed by comparing the monthly returns of the funds with that of Indian stock market benchmark S&P CNX NIFTY. For this purpose, risk-adjusted performance measures suggested by Sharpe, Treynor and Jensen have been used. The Net Asset Value (NAV) of tax saving schemes from 2006-07 to 2011-12 has been considered. There was volatility in the performance of all the funds during the entire period of study. All the schemes follow the same pattern in returns and move along with the stock market index S&P CNX NIFTY. As expected, all the funds showed negative returns during 2008-09 and it was higher than that of the stock market index. The average return of most of the schemes is higher and the average risk is lower than the benchmark S&P CNX NIFTY.

© 2012 IUP. All Rights Reserved.