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.

Risk management constitutes one of the most important part of the banking industry which deals with the evaluation of the riskiness of potential borrowers and also in building up a well-diversified portfolio. The stability of banks depends upon the quality of risk it selects and management of its capital endowment which help the banks to survive in adverse economic cycles. Capital is the main instrument of financial system supervisors who are interested in safeguarding the stability of the system by reducing the risk of bank failures (Berger et al., 1995). The Basel Committee on Banking Supervision always keeps an eye on the risk management framework. The main objective of this framework is to keep a minimum amount of capital as risk capital from the total capital endowment for its exposure to risk.

Value at Risk (VaR) is a powerful method for assessing the overall market risk. It was first introduced in 1996 in the regulatory domain of Bank for International Settlements in the context of measuring market risk. After that it was extended to other risk measurements like credit and operational risk. Today it is accepted as a useful instrument in measuring the risk. Over time, it has also been used by the private financial institutions to access the risks on
their assets/portfolios.

All the investors try to find the answer to the question as to what he or she will lose at the most if the investment is done. VaR tries to give an answer up to a reasonable bound by measuring the potential loss in the value of a risky asset or portfolio over a defined period for a given confidence interval.

There have been extensive studies dealing with estimation and analysis of VaR (Benninga and Wiener, 1998; Manganelli and Engle, 2001; Consigli, 2002; Frey and McNeil, 2002; José, 2003; Benati and Rizzi, 2007; Alexander and Baptista, 2008; Lin, 2008; and Yoshida, 2009). Still, there is a need for improvement in the analysis of VaR in banking
industry. Further, there is a lack of study on Indian banking industry. The objective of this paper is to calculate the VaR for the banking sector index, BANKEX, in different time periods starting from 2003 marking the structural shifts in the system, and compare the calculated risk across the periods of varying economic situation.

Financial Risk Management Journal, Value at Risk, technology, financial engineering , risk in the financial world, financial instrument, confidence level.