“APPLYING HYBRID APPROACH TO CALCULATING VAR IN

CROATIA“

M.Sc. Saša Žiković

Faculty of Economics University of Rijeka/Assistant
Ivana Filipovića 4, Rijeka, Croatia
Phone: +385 51 355 111 Fax: +385 51 212 268 E-mail: sasa.zikovic@efri.hr

Key words: Value at Risk, historical simulation, hybrid approach, Croatia

1. INTRODUCTION

The most prominent of risks present in trading operations of a bank is the market risk, since it
reflects the potential economic loss caused by the decrease in the market value of a bank’s
portfolio of securities.

According to the 1996 Market Risk Amendment to the Basel Accord, besides using the
standardized approach, banks can set their capital requirements for market risk of their trading
positions based on the ten-day 1-percent VaR. The 1996 Amendment allows ten-day 1-
percent VaR to be measured as a multiple of one-day 1-percent VaR by using a simplistic
square root of time rule1. Although VaR is a conceptually simple measure of risk, computing
VaR in practice can be very difficult due to a simple reason that position risk of a bank's
portfolio depends on the joint distribution of all of the securities composing that particular
portfolio. Fortunately, portfolio level risk measurement requires only a univariate, portfolio-
level model2 thus drastically reducing the computational burden of multivariate models. If
interest centres on the distribution of the portfolio returns, then this distribution can be
modelled directly from portfolio returns rather than via aggregation based on a larger and
almost inevitably less-well-specified multivariate model.

In this paper the author examines the theoretical background of two nonparametric
approaches to calculating VaR, historical simulation and hybrid approach developed by
Boudoukh, Richardson and Whitelaw, and examines their performance in a transitional capital
market such as Republic of Croatia. The paper evaluates and analyses the out-of-sample
forecasting accuracy of both methods on two Croatian indexes, CROBEX – the official index of
Zagreb Stock Exchange and VIN - the official index of Varazdin Stock Exchange. In section 2 of
the paper, an overview of Value at Risk as a methodology for measuring market risk is
presented. Section 3, present the methodology of calculating VaR via historical simulation. In
section 4, a hybrid nonparametric approach to calculating VaR is presented and its advantages
and disadvantages are discussed. Section 5 analyses the characteristics of Croatian financial
market. In section 6, out-of-the-sample performance evaluation of historical simulation and
hybrid BRW approach, with different observation windows and decay factors is performed on
two Croatian stock indexes. The conclusions are summarized in Section 7.

1
Basel Committee on Banking Supervision (1996): ‘Amendment to the Capital Accord to incorporate Market
Risks. Bank for International settlements’, BIS, January 1996
2
Benson, P. and Zangari, P. (1997): ‘A general approach to calculating VaR without volatilities and
correlations’, RiskMetrics Monitor, (second quarter 1997): 19-23
2. MEASURING MARKET RISK USING VAR METHODOLOGY

Value at Risk (VaR) has become the standard measure that financial analysts use to quantify
market risk. It is defined as the maximum potential loss in value of a portfolio of financial
instruments with a given probability over a certain horizon. It indicates how much can a bank
expect to lose with probability C for a given time horizon3. The main advantage of VaR as a
risk measure over other risk measures is that it is theoretically simple. VaR can be used to
summarize the risk of individual positions, or a risk of large portfolio of an internationally
active bank. VaR reduces the risk associated with any portfolio to just one number, the
expected loss associated with a given probability over a defined holding period.

VaR for a given probability C can be expressed as:

VaRc = F-1(C)
where F–1(C) denotes the inverse of cumulative probability distribution of the changes in the
market value of a portfolio. Thus, losses greater than the estimated VaR should only occur
with the probability 1-C. For example, if a VaR calculated at the C% confidence level is
accurate, then losses greater than the VaR measure, so-called “tail events”, should on average
only occur C*N times in every N trading days.

While VaR is a very easy and intuitive concept, its measurement is a very challenging
statistical problem. Although the existing models for calculating VaR employ different
methodologies, some are entire parametric, while other are semi parametric or nonparametric
in their nature, they all follow a common general structure:
1) Marking to market of a portfolio of securities,
2) Estimation of distribution of portfolio returns (using either parametric or
nonparametric methods),
3) Calculating the VaR of the portfolio.

The main difference among numerous VaR methods is related to the estimation of distribution
that adequately describes the portfolio returns, i.e. the way the problem of how to estimate the
possible changes in the value of the portfolio is dealt with.

Research papers dealing with VaR calculation or volatility forecasting in the financial markets
of Croatia or EU new member states are very rare. Croatia as an EU member candidate state
offers large profits for investors, and represents a very interesting opportunity for foreign
investors, primarily banks. Most of the banking sector in Croatia, about 92%, is foreign
owned, and banks that operate in Croatia employ the same risk measurement models in
forming of provisions as they do in developed markets. This means that risk managers in
Croatian banks de facto presume similar or even equal market characteristics and behaviour in
Croatian market, as they would expect in developed markets. This is a dangerous assumption,
which is not realistic. Employing VaR models in forming of bank’s provisions that are not
suited to financial markets that they are used on, can have serious consequences for banks,
resulting in significant losses in trading portfolio that could pass undetected by the employed
risk measurement models, leaving the banks unprepared for such events.

3
Jorion, P. (2001): Value at Risk, The New Benchmark for Managing Financial Risk, Second Edition, New
York: McGraw Hill
Most of the widespread VaR methods used in the financial industry do not capture the
following characteristics of financial markets that are known since the pioneering work of
Mandelbrot (1963)4:

1. Equity returns are usually skewed to the left.

2. Distribution of financial return is leptokurtotic, i.e. it has fatter tails and a higher peak than
described under Gaussian distribution.
3. There is significant autocorrelation in financial time series, i.e. periods of high and low
volatility tend to cluster.

The last assumption is a very important characteristic of financial returns, since it means that
market volatility can be consider as being quasistable, subject to change in longer periods, but
stable in the short run. This gives some justification to the assumption that is the basis for
most of the VaR models (historical simulation among them), that recent past will be similar to
near future.

3. MEASURING VAR USING HISTORICAL SIMULATION

One of the most common methods for VaR estimation is the historical simulation (HS VaR).
This approach drastically simplifies the procedure for computing VaR, since it doesn’t make
any direct distributional assumption about portfolio returns.

Banks often rely on VaR figures calculated by historical simulations. The value of VaR is
calculated as the 100C’th percentile or the (T+1)C’th order statistic of the set of pseudo
portfolio returns.

In principle it is easy to construct a time series of historical portfolio returns using current
portfolio holdings and historical asset returns. The returns on the indexes in this paper are
calculated as:
P
rt = ln(1 + Rt ) = ln t
Pt −1

The problem is that historical asset prices for the assets held at some point in time may not be
available. In such a case “pseudo” historical prices must be constructed using either pricing
models, factor models or some ad hoc consideration. The current assets without historical
prices can for example be matched to “similar” assets by capitalization, industry, leverage,
and duration. Historical pseudo asset prices and returns can then be constructed using the
historical prices on these substitute assets:
N
rw,t = ∑ wi ,T ri ,t ≡ W 'T Rt , t = 1, 2,…, T
i =1

Historical simulation VaR can than be expressed as:

HS − VaRTC+1|T ≡ rw ((T + 1)C )

where rw ((T + 1)C ) is taken from the set of ordered pseudo returns {rw (1), rw (2),..., rw (T )}. If
(T+1)C is not an integer value then the two adjacent observations can be interpolated to
4
Mandelbrot, B. (1963): 'The Variation of Certain Speculative Prices', The Journal of Business, Vol. 36, No. 4,
(October 1963): 394-419
calculate the VaR. Historical simulation has some serious problems, which have been well
documented5. Perhaps most importantly, it does not properly incorporate conditionality into
the VaR forecast. The only source of dynamics in the HS VaR is the fact that the observation
window is updated with the passing of time. This source of conditionality is minor in practice.

Historical Simulation is based on the concept of rolling windows. The process of calculating
VaR by historical simulation begins by choosing a length of the window of observations,
which usually ranges from two months to two years. Calculated portfolio returns within the
observation window are sorted and the desired quantile is given by the return xi that satisfies
the condition that j out of n observations do not exceed it. The probability that j out of n
observations do not exceed some fixed value of observed variable x follows a binomial
distribution:
n
P{ j _ observations ≤ x} =  j {F ( x)} j {1 − F ( x)}n − j
 
It follows that the probability of at least i observations in the selected sample do not exceed x
also follows a binomial distribution:
n
n
Gi ( x) = ∑  j {F ( x)} j {1 − F ( x)}n − j
j =i  

Gi(x) is the distribution function of the order statistic and thus also of the VaR.

To compute the VaR the following day, the whole window is moved forward by one
observation and the entire procedure is repeated.

Historical simulation method assigns equal probability weight of 1/N to each observation.
This means that the historical simulation estimate of VaR at the C confidence level
corresponds to the N(1-C) lowest return in the N period rolling sample. Because a crash is the
lowest return in the N period sample, the N(1-C) lowest return after the crash, turns out to be
the (N(1-C)-1) lowest return before the crash. If the N(1-C) and (N(1-C)-1) lowest returns
happen to be very close in magnitude, the crash actually has almost no impact on the
historical simulation estimate of VaR for the long positions in a portfolio of securities. From
the equation for historical simulation it can be seen that HS VaR changes significantly only if
the observations around the order statistic rw ((T + 1)C ) change significantly.

Although historical simulation makes no explicit assumptions about the distribution of

portfolio returns, an implicit assumption is hidden behind the procedure: the distribution of
portfolio returns doesn’t change within the window. From this implicit assumption several
problems may arise in using this method in practice. From the assumption that all the returns
within the observation window used in historical simulation have the same distribution, it
follows that all the returns of the time series also have the same distribution: if yt-window,...,yt
and yt+1-window,...,yt+1 are independently and identically distributed (IID), then also yt+1 and yt-
window has to be IID, by the transitive property. Another serious problem of the historical
simulation is the fact that for the empirical quantile estimator to be consistent, the size of
observation window must go to infinity. The length of the observation window hides another
serious problem. Forecasts of VaR under historical simulation are meaningful only if the

5
Pritsker, M. (2001): ‘The Hidden Dangers of Historical Simulation’, Board of Governors of the Federal
Reserve System, Economics Discussion Series, Working paper, No. 27, April 2001.
historical data used in the calculations have the same distribution. The length of the window
must satisfy two contradictory properties: it must be large enough, in order to make statistical
inference significant, and it must not be too large, to avoid the risk of taking observations
outside of the current volatility cluster. Clearly, there is no easy solution to this problem.6

If the market is moving from a period of low volatility to a period of high volatility, VaR
forecasts based on the historical simulation will under predict the true risk of a position since
it will take some time before the observations from the low volatility period leave the
observation window.

Finally, VaR forecasts based on historical simulation may present predictable jumps, due to
the discreteness of extreme returns. If VaR of a portfolio is computed using a rolling window
of N days and that today’s return is a large negative number, it is easy to predict that the VaR
estimate will jump upward, because of today’s observation. The same effect (reversed) will
reappear exactly after N days, when the large observation drops out of the observation
window.

4. EXPONENTIAL MODIFICATION OF HISTORICAL SIMULATION

When relaxing the assumption that returns are IID, it might be reasonable to assume that
simulated returns from the recent past better represent today portfolio's risk than returns from
the distant past. Boudoukh, Richardson, and Whitelaw, BRW hereafter, used this idea to
introduce a generalization of the historical simulation and assign a relatively higher amount of
probability weight to returns from the more recent past.7

The BRW approach combines RiskMetrics and historical simulation methodologies, by

applying exponentially declining weights to past returns of the portfolio. Each of the most
recent N returns of the portfolio, yt, yt-1, ..., yt-N+1, is associated a weight,
1− λ  1− λ   1 − λ  N −1
N 
, N 
λ ,...,  N 
λ respectively8. After the probability weights are assigned,
1− λ  1− λ  1− λ 
VaR is calculated based on the empirical cumulative distribution function of returns with the
modified probability weights. The basic historical simulation method can be considered as a
special case of the more general BRW method in which the decay factor - λ is set equal to 1.

The BRW method involves a simple modification of the historical simulation. However, the
modification makes a large difference. The most recent return in the BRW methods receives
probability weights of just over 1% for λ = 0,99 and of just over 3% for λ = 0,97. In both
cases, this means that if the most recent observation is the worst loss of the N days, then it will
be the VaR estimate at the 1% confidence level. Hence, the BRW methods appear to remedy
the main problems with the historical simulation methods because very large losses are
immediately reflected. The simplest way to implement BRW's approach is to construct a
history of N hypothetical returns that the portfolio would have earned if held for each of the
previous N days, rt-1,…, rt-N and then assign exponentially declining probability weights wt-

6
Manganelli, S. and Engle F.R. (2001): ‘Value at Risk models in Finance’, ECB working paper series, Working
paper, No. 75, August 2001
7
Boudoukh, J., Richardson, M. and Whitelaw, R. (1998): ‘The best of both worlds’, Risk, Vol. 11, No. 5, (May
1998): 64-67
8 1− λ
The role of the term is to ensure that the weights sum to 1.
1 − λN
1,…, wt-N to the return series9. Given the probability weights, VaR at the C percent confidence
level can be approximated from G(.; t;N), the empirical cumulative distribution function of r
based on return observations rt-1,…, rt-N.
N
G ( x; t , N ) = ∑ 1{rt−i ≤ x} wt −i
i =1

Because the empirical cumulative distribution function, unless smoothed, for example via
kernel smoothing as suggested by Butler and Schachter (1998)10, is discrete, the solution for
VaR at the C percent confidence level will typically not correspond to a particular return from
the return history. Instead, the BRW solution for VaR at the C percent confidence level can be
between a return that has a cumulative distribution that is less than C, and one which has a
cumulative distribution that is more than C. These returns can be used as estimates of the
BRW method's VaR estimates at confidence level C. The estimate that understates the BRW
estimate of VaR at the C percent confidence level (upper limit) is given by11:

BRW u (t | λ , N , C ) = inf(r ∈ {rt −1 ,...rt −1− N } | G (r ; t , N ) ≥ C )

and the estimator of lower limit is given by:

BRW o (t | λ , N , C ) = sup( r ∈ {rt −1 ,...rt −1− N } | G (r ; t , N ) ≤ C )

where λ is the exponential weight factor, N is the length of the history of returns used to
compute VaR, and C is the VaR confidence level.

BRW u (t | λ , N , C ) is the lowest return of the N observations whose empirical cumulative

probability is greater than C, and BRW o (t | λ , N , C ) is the highest return whose empirical
cumulative probability is less than C.

The main issue in evaluation of BRW based VaR, as a risk measure, is the extent to which
VaR forecasts based on the BRW method respond to changes in the underlying risk factors. It
is important to know under what circumstances risk estimates increase when using the
BRW u (t | λ , N , C ) estimator. The result is provided in the following proposition:

If rt > BRW u (t , λ , N ) then BRW u (t + 1, λ , N ) ≥ BRW u (t , λ , N ) .

When the VaR estimate using the BRW method is estimated for returns during time period
t+1, the return at time t−N is dropped from the sample, the return at time t receives weight
1− λ
and the weight on all other returns are λ times their earlier values.
1 − λN
Consequently, r(C) is defined as:

9
The weights sum to 1 and are exponentially declining at rate λ (0 < λ ≤ 1)
N

∑w i =1
t −i =1

wt −i −1 = λwt −i
10
Butler, J.S. and Schachter, B. (1998): ‘Estimating Value-at-Risk with a Precision Measure by Combining
Kernel Estimation with Historical Simulation’, Review of Derivatives Research, No. 1, (1998): 371-390
11
Pritsker, M. (2001)
r (C ) = {rt −1 , i = 1,...N | G (rt −1 ; t , N ) ≤ C}

To verify the proposition, it suffices to examine how much probability weight the VaR
estimate at time t+1 places below BRW u (t , λ , N ) . There are two cases to consider:

Case 1: rt − N ∉ r (C ) In this case, since by assumption, rt ∉ r (C ) then

G ( BRW u (t , λ , N ); t + 1, λ , N ) < λG ( BRW u (t , λ , N )) . Therefore,

BRW u (t + 1, λ , N ) = inf(r ∈ {rt ,...rt −1− N } | G (r ; t + 1, λ , N ) ≥ C ) ≥ BRW u (t , λ , N )

Case 2: rt − N ∈ r (C ) . In this case, since rt ∈ r (C ) by assumption, then

G ( BRW o (t , λ , N ); t + 1, λ , N ) < λG ( BRW o (t , λ , N ))

Therefore,
BRW o (t + 1, λ , N ) = sup( r ∈ {rt ,...rt −1− N } | G (r ; t + 1, λ , N ) ≤ C ) ≤ BRW o (t , λ , N )

The proposition shows that when losses at time t are bounded below the BRW VaR estimate
at time t, the BRW VaR estimate for time t+1 will indicate that risk at time t+1 is no greater
than it was at time t. To understand the importance of this proposition, it suffices to examine
the case when today's BRW VaR estimate for tomorrow's return is conditionally correct, but
that risk changes with returns, so that tomorrow's return will influence risk for the day after
tomorrow. Under these circumstances, an important question is what is the probability that a
VaR estimate that is correct today will increase tomorrow. The answer provided by the
proposition is that tomorrow's VaR estimate will not increase with probability 1−C. So, for
example, if C is equal to 1%, then a VaR estimate that is correct today will not increase
tomorrow with probability 99%.

Although the BRW approach suffers from the explained logical inconsistency, this approach
still represents a significant improvement over the historical simulation, since it drastically
simplifies the assumptions needed in the parametric models and it incorporates a more
flexible specification than the historical simulation approach. To better understand the
assumptions behind the BRW approach and its connection to historical simulation, BRW
quantile estimator can be expressed as12:

∑ y I (∑ )
t
N
qˆt +1,C = j i =1
f i (λ ; N ) I ( yt +1−i ≤ y j ) = C
j = t − N +1

where f i (λ ; N ) are the weights associated with return yi and I(●) is the indicator function. If
f i (λ ; N ) = 1 / N BRW quantile estimator equals the historical simulation estimator. The main
difference between BRW approach and historical simulation is in the specification of the
quantile process. With historical simulation each return is given the same weight, while with
the BRW approach returns have different weights, depending on how old the observations are.
Strictly speaking, none of these models is nonparametric, since a parametric specification is
proposed for the quantile. Boudoukh, Richardson and Whitelaw in their original paper set λ

12
Manganelli, S. and Engle F.R. (2001)
equal to 0,97 and 0,99, as in their framework no statistical method is available to estimate this
unknown parameter.

5. ANALYSIS OF CROATIAN FINANCIAL MARKET

For a transitional economy, with a short history of market economy such as Croatia the main
problem for a statistically significant analysis is the short history of active trading in the
financial markets and their low liquidity. Because of the short time series of returns of
individual stock and their highly variable liquidity it is practical to analyse the stock indexes
of the two stock exchanges in Croatia. Although a small country, Croatia has two stock
exchanges, Zagreb Stock Exchange (ZSE) and Varazdin Stock Exchange (VSE). This
situation reduces further the liquidity of an already illiquid market, so choosing to analyse the
portfolio of securities that form the official stock indexes of Zagreb Stock Exchange
(CROBEX) and Varazdin Stock Exchange (VIN), and by definition present the most liquid
stocks on these stock exchanges presents itself as a logical choice.

The analysis of the two stock indexes is performed in period 04.01.2000. – 04.01.2006. In this
observation period the obtained sample of CROBEX index consists of 1469 observations, and
for VIN index, the sample consists of 1483 observations. The data is sourced from ZSE and
VSE. Since the period from the beginning of year 2000 onward was very turbulent for
Croatian financial market, the analysis of the selected indexes consists of three parts (entire
period, first and second half of the period). This procedure is implemented to detect any
structural changes in the characteristics of selected indexes, i.e. test if the assumption of
stationarity of time series can be applied, while at the same time no generality is lost due to
the statistically significant number of observations in analysed half-periods.

In case of CROBEX index, half-periods consist of 734 observations, and the first half-period
covers the period from 04.01.2000 to 19.12.2002, for VIN index half periods consist of 741
observations, and the first half period, covers the same period as CROBEX index.

The two analysed indexes show a strong positive trend. This was expected since Croatian
securities are currently trading at a discount compared to other surrounding market, especially
EU new member states. Due to the process of accession of Republic of Croatia to the
European Union, and the adjustment of legislation and business climate to European
standards, the growth of stock indexes is a natural consequence. Croatia is subject to an ever-
growing inflow of foreign direct and portfolio investments that is further boosting the
appreciation of Croatian securities. From figures 1 to 4 it is visible that there is significant
volatility clustering and presence of extreme positive and negative returns.

Looking at a measure of linear dependence between two variables i.e. correlation coefficient
which equals 0,9714 for the entire analysed period, suggest that the CROBEX index and VIN
index are strongly positively correlated. First half-period sample correlation coefficient
between CROBEX index and VIN index equals 0,8954. Second half period sample
correlation coefficient between CROBEX index and VIN index equals 0,9782. These results
indicate that in both half-periods there is significant linear dependence between these two
indexes, as could be expected because although there are composed of completely different
securities, they both represent the same market. The fact that there is a strong linear
dependence between these two indexes, that has strengthened even further in the last three
years, and the fact that the presence of two stock exchanges in such a small country reduces
the transparency and liquidity of the whole financial market gives a strong argument to those
that advocates the merger of two Croatian stock exchanges. In spite of the strong linear
dependence of the two indexes, their descriptive statistics, in particular higher moments
around the mean, tell a different story. Descriptive statistics for the CROBEX and VIN index
are presented in table 1.
Table 1 - Summary descriptive statistics for CROBEX and VIN index in the period 04.01.2000 - 04.01.2006.
CROBEX CROBEX CROBEX VIN index VIN index
Descriptive VIN index
index (whole index (first index (whole (second
statistics (first half)
period) half) (second half) period) half)
Mean 0,00067 0,00059 0,00074 0,00128 0,00096 0,00160
Median 0,00023 0,00046 0,00009 0,00053 0,00 0,00100
Mode 0,00 0,00 0,00 0,00 0,00 0,00
Minimum -0,09032 -0,08854 -0,09032 -0,15670 -0,15670 -0,06547
Maximum 0,11399 0,11399 0,07355 0,10186 0,10186 0,05837
St.Dev. 0,01359 0,01596 0,01071 0,01280 0,01493 0,01025
Skewness 0,23920 0,39708 -0,30973 -0,68183 -0,94255 0,35245
Kurtosis 9,86525 7,59346 11,71601 20,76386 20,83433 5,59279

Both CROBEX and VIN index have significant positive means and medians in the entire
analysed period as well in both half-periods. This clearly points to the conclusion that
securities composing these two indexes had a steady positive mean, resulting in considerable
capital gains for the investors. For both indexes the highest positive means are present in the
second half-period which covers the period from 20.12.2002 to 04.01.2006, and can be easily
explained by the positive influence of the accession negotiations between Croatia and EU.
Mean, median and mode of the stock indexes are not equal for individual indexes, which is
assumed under normality of the distribution. Standard deviation of both indexes is quite high
during the entire analysed period, and is equal to 13,59% for CROBEX index, and 12,80% for
VIN index. Both indexes were more volatile in the first analysed half-period, equalling
15,96% for CROBEX index, and 14,93% for VIN index. Based on the standard deviation of
the two indexes, it turns out that CROBEX index was the more volatile index, and thus
riskier. Combining this conclusion with the realized daily mean return, during the entire
period, for CROBEX index (0,067%) and for VIN index (0,128%), it turns out that VIN
index, in the entire observed period, was at the same time less volatile and more profitable,
especially in the second half period when its daily mean return reached 0,160%.

Third moment around the mean (skewness) for both indexes, and all the analysed periods, is
significantly different from the zero, which is assumed under normal distribution. In the entire
analysed period VIN index had negative skewness of –0,68183, while CROBEX index had
positive skewness of 0,2392. This fact is very important for the investors meaning that the
probability of positive returns occurring is far greater when investing in CROBEX index than
in VIN index. The interesting phenomenon is the significant positive skewness in the second
half period of the VIN index and negative skewness of CROBEX index. This shows that in
the last three years the skewness of the analysed indexes has completely changed, VIN index
has become positively skewed, while CROBEX index has become negatively skewed. The
fourth moment around the mean (kurtosis) for both indexes, and all the analysed periods is
different from the zero, as presumed under normality. Both indexes experienced extreme daily
returns in the observed period. The high values of kurtosis for these indexes, especially VIN
index, indicate to the investors investing in either stock exchange that they can expect
unusually high, both positive and negative returns on their investments.

Combining the third and fourth moment of the VIN index with the previously described mean
and standard deviation, one may conclude that, although in the entire observation period,
negative returns were more frequent than positive returns, the magnitude of the positive
returns was significantly higher than the magnitude of loses resulting in a strong positive
trend and continually growing index. In case of the CROBEX index, for the whole period, the
standard deviation was higher compared to the VIN index, and also the mean return was
lower, meaning that from the classical portfolio theory perspective CROBEX index can be
viewed as an inferior portfolio compared to VIN index. Skewness and kurtosis, during the
entire period, of CROBEX index indicate that from higher moments perspective was in fact
not as inferior to the VIN index as could be expected from looking at just the first two
moments of the distribution of the returns of these two indexes.

To determine if the daily returns of CROBEX and VIN indexes are normally distributed,
normality of distribution is tested in several ways. For CROBEX index, the tests and analysis
are performed on 1469 observations for the entire period and 734 observations for half-
periods. For VIN index, the tests and analysis are performed on 1483 observations for the
entire period and 741 observations for half-periods. The simplest test of normality is the
analysis of the third and fourth moment around the mean of the distribution. Third moment
around the mean, asymmetry, in the case of normal distribution should be zero. Negative
asymmetry means that the distribution is skewed to the left, which implies that there is a
greater chance of experiencing negative returns, and vice versa. Fourth moment around the
mean, kurtosis, in the case of normal distribution, when modified, should also equal zero.
Kurtosis higher than zero means that the distribution has fatter tails than normal distribution,
meaning that more extreme events occur more frequently in the sample data than can be
expected under normal distribution. More sophisticated tests of normality of distribution used
in this paper are Lilliefors test, Shapiro-Wilks test and Jarque-Bera test. Normality tests for
the CROBEX and VIN index are presented in table 2.
Table 2 – Tests of normality of distribution for CROBEX and VIN index returns in the period 04.01.2000 -
04.01.2006.
CROBEX CROBEX CROBEX VIN index VIN index
VIN index
Normality index (whole index (first index (whole (second
(first half)
tests period) half) (second half) period) half)
Lilliefors 0,09406 0,10067 0,08178 0,10510 0,11095 0,08961
(p value) 0,00 0,00 0,00 0,00 0,00 0,00
Shapiro Wilk 0,89222 0,90728 0,89983 0,86270 0,84574 0,92738
(p value) 0,00 0,00 0,00 0,00 0,00 0,00
Jarque-Bera 5.900,70 1.741,80 4.118,80 26.470,00 13.241,00 957,33
(p value) 0,00 0,00 0,00 0,00 0,00 0,00
Critical value for Lilliefors test (whole period = 0,023124, half period = 0,032703)
Critical value for Jarque-Bera test = 5,9915

All normality tests show that the hypothesis of the normality of returns for CROBEX and
VIN indexes, over all the analysed periods, should be rejected at 5% significance level.
Probability values of distribution of returns being normal, for both indexes, under all of the
normality test are zero, strongly indicating that there is no possibility that the returns on these
indexes are normally distributed. The distribution of CROBEX and VIN index returns are
leptokurtotic and are not symmetrical i.e. they skew to the left and to the right, as can be seen
from figure 5.

Since the assumption of IID returns underlies the logic behind the historical simulation it is
necessary to test whether returns of the analysed time series are indeed IID. Returns on
financial assets themselves are usually not dependent (correlated), otherwise traders could
forecast daily returns. Returns squared are usually dependent; meaning that volatility of the
returns can be forecasted, but not the direction of the change of a variable.
A widely accepted approach to detecting volatility clusters, which is actually autoregression
in the data, is the Ljung-Box Q-statistic calculated on the squared returns and Engle’s
Archtest. Ljung-Box Q-statistic is the lth autocorrelation of the T-squared returns, and
calculates whether the size of the movement at time t has any useful information to predict the
size of the movement at time t+l. Engle's Archtest for the presence of autoregressive
conditional heteroskedasticity (ARCH) effects tests the hypothesis that a time series of sample
residuals consists of IID Gaussian disturbances, i.e., that no ARCH effects exist. Ljung-Box
Q-statistic and Archtest for CROBEX and VIN index are presented in table 3.

The Ljung-Box Q-statistic and Engle’s Archtest confirm that there is significant
autocorrelation and ARCH effects present in both indexes i.e. that the volatilities tend to
cluster together (periods of low volatility are followed by further periods of low volatility and
vice versa), and for all the analysed periods, with the exception of CROBEX index in the
second-half period, meaning that the returns on CROBEX and VIN index are not IID. The
results are that much more indicative when considering that the hypothesis of IID was
rejected for all the tested time lags (5, 10, 15 and 20 days) and all of the indexes, with the
exception of CROBEX index in the second half-period. This is very indicative for risk
managers, because these tests prove that the elementary assumption of historical simulation is
not satisfied, and that the VaR figures obtained from it cannot be trusted and can at best
provide only unconditional coverage. Because of the existence of volatility clustering BRW
approach could provide a better alternative to historical simulation, due to the fact it assigns
more probability weight to recent events, thus providing an updating scheme that is more
responsive to changes in the market.

6. PERFORMANCE EVALUATION OF HISTORICAL SIMULATION AND BRW

APPROACH ON CROATIAN STOCK INDEXES

The performance of the historical simulation and BRW approach is tested in two ways. First
test is the Kupiec test13, a simple expansion of the failure rate, which is also prescribed by
Basel Committee on Banking Supervision. The set-up for this test is the classic framework for
a sequence of successes and failures, also known as Bernoulli trials. The second test used is
the test of temporal unpredictability of extreme returns i.e. tail events. While extreme returns
do happen, a good VaR estimator should not allow them to cluster together. An efficient VaR
estimator should react in such a way that once a tail event occurs, it increases in such a way
that, given this new estimate, the next tail event has the same probability of occurring i.e. it is
temporally independent. The testing of temporal independence of tail events is done by
examining the sample autocorrelation function of tail events, which in the case of temporal
independence should not be significant.

For the period of 1.000 days realized daily returns of CROBEX and VIN index are compared
with the VaR forecasts based on historical simulation and BRW approach at 95%, 97,5% and
99% confidence level. Four historical simulation models with rolling windows of (50, 100,
250 and 400 days), and two BRW models with decay factors of 0,99 and 0,97, are shown in
figures 6 to 17. Backtesting results of Kupiec test are presented in table 5, and backtesting
results of test of temporal independence of tail events is presented in table 4.

Backtesting results based on Kupiec procedure, for both indexes indicate that historical
simulation based on shorter rolling windows (50 and 100 days) performs poorly at both 95%,

13
Jorion, P. (2001)
97,5% and at 99% confidence level. Historical simulation based on longer observation periods
(250 and 400 days) was accepted at 5% significance level, as being unconditionally correct
for both indexes at 95% and 97,5% confidence level but failed at 99% confidence level, with
the exception of historical simulation based on 400 day rolling window which provided
unconditionally correct coverage for VIN index at all the tested confidence levels. A fair
performance of historical simulation models based on longer observation periods can be
attributed to the fact that more extreme losses were present in the observation period, and that
is why the binomial test accepted these models as being unconditionally correct, but
unfortunately these models are also the slowest to react to the changes. Backtesting results for
historical simulation based on test of temporal independence of tail events show that there
exists temporal dependence in the tail events for all of the tested historical simulation models.
When comparing the results of test for temporal independence between the indexes, they are
mixed, and show that for CROBEX index historical simulation performed quite well while for
VIN index it performed poorly. This results show that historical simulation is not an efficient
VaR estimator and does not react adequately to the changes in the market and occurrence of
extreme events i.e. it does not adapt adequately and timely to the changes, and thus does not
reflect the true risk of a position.

Backtesting results for BRW approach based on Kupiec procedure, for both indexes show that
BRW approach performed quite good, with BRW model with decay factor set at 0,97
provided unconditional coverage for 95% and 97,5% confidence levels for both indexes but
failed at 5% significance level for 99% confidence level. BRW model with decay factor set at
0,99 provided unconditional coverage for both indexes, at all of the tested confidence levels.
Backtesting results for BRW approach based on test of temporal independence of tail events
show mixed results. The existence of temporal dependence in the tail events under BRW
approach for VIN index can be confirmed for both BRW models. In case of the CROBEX
index, the existence of temporal dependence in the tail events under BRW approach can be
rejected. This shows that when it comes to temporal independence, BRW approach should not
be taken for granted since it also showed that it to does not always react adequately to the
changes in the market and can also be misleading about the true level of risk.

On a sample of two Croatian stock indexes, CROBEX and VIN, BRW approach proved to be
a far better performer according to both the Kupiec test and test of temporal independence.
BRW model with decay factor set at 0,99, according to the Kupiec test provided
unconditional coverage for both indexes, at all of the tested confidence levels and as such was
the best performer. According to the test of temporal independence BRW models were also
better performers than any historical simulation models.

The results point to the conclusion that even though historical simulation with longer
observation periods provided correct unconditional coverage for 95% and 97,5% confidence
levels banks and other investors should be very careful when using it. Historical simulation
should not be used for high confidence level estimates (above 95%), especially models based
on shorter rolling windows. The obtained results show that although BRW approach also has
its flaws, especially when testing for temporal dependence in the tail events, it brings
significant improvement to historical simulation with minimal additional computational effort
and could prove to be an interesting alternative to historical simulation.
7. CONCLUSION

Banks operating in Croatia and other EU new member and member candidate states employ
the same risk measurement models in forming of provisions as they do in developed markets.
This means that risk managers de facto presume similar or even equal market characteristics
and behaviour in these developing markets, as they would expect in developed markets. This
is a dangerous assumption, which is not realistic. Employing VaR models in forming of
bank’s provisions that are not suited to financial markets that they are used on, can have
serious consequences for banks, resulting in significant losses in trading portfolio that could
pass undetected by the employed risk measurement models, leaving the banks unprepared for
such events. In this paper the author evaluates the performance of a widely spread VaR risk
measure – historical simulation against a hybrid model developed by Boudoukh, Richardson,
and Whitelaw, in transitional surroundings. The performance of the VaR models is evaluated
out-of-the-sample for two Croatian stock indexes based on a time series of 1.000 observations
by using Kupiec test and test of temporal independence of tail events.

The author finds that the basic assumption underlying the implementation of historical
simulation is violated in case of two tested indexes i.e. the assumption that analysed returns
are IID was rejected. Based on the performed tests it can be concluded that historical
simulation should not be used for high confidence level estimates (above 95%), especially
models based on shorter rolling windows. The obtained results show that although BRW
approach also has its flaws, especially when testing for temporal dependence in the tail
events, it brings significant improvement to historical simulation with minimal additional
computational effort. BRW approach should be further studied and tested in other transitional
and emerging economies, because based on these obtained results it prove to be a far better
alternative to historical simulation.

BIBLIOGRAPHY:
1. Basel Committee on Banking Supervision (1996): ‘Amendment to the Capital Accord to incorporate
Market Risks. Bank for International settlements’, BIS, January 1996

2. Benson, P. and Zangari, P. (1997): ‘A general approach to calculating VaR without volatilities and
correlations’, RiskMetrics Monitor, (second quarter 1997): 19-23

3. Boudoukh, J., Richardson, M. and Whitelaw, R. (1998): ‘The best of both worlds’, Risk, Vol. 11, No. 5,
(May 1998): 64-67

4. Butler, J.S. and Schachter, B. (1998): ‘Estimating Value-at-Risk with a Precision Measure by
Combining Kernel Estimation with Historical Simulation’, Review of Derivatives Research, No. 1,
(1998): 371-390

5. Jorion, P. (2001): Value at Risk, The New Benchmark for Managing Financial Risk, Second Edition,
New York: McGraw Hill

6. Mandelbrot, B. (1963): 'The Variation of Certain Speculative Prices', The Journal of Business, Vol. 36,
No. 4, (October 1963): 394-419

7. Manganelli, S. and Engle F.R. (2001): ‘Value at Risk models in Finance’, ECB working paper series,
Working paper, No. 75, August 2001

8. Pritsker, M. (2001): ‘The Hidden Dangers of Historical Simulation’, Board of Governors of the Federal
Reserve System, Economics Discussion Series, Working paper, No. 27, April 2001.
Table 3 - Test of independency for CROBEX and VIN index returns in the period 04.01.2000 - 04.01.2006.
Ljung-Box-Pierce Q-test (CROBEX index - whole period) Ljung-Box-Pierce Q-test (CROBEX index - first half)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0 156,830 11,070 5 1 0 105,460 11,070
10 1 0 169,500 18,307 10 1 0 109,870 18,307
15 1 0 184,490 24,996 15 1 0 119,710 24,996
20 1 0 199,270 31,410 20 1 0 128,680 31,410
ARCH test (CROBEX index - whole period) ARCH test (CROBEX index - first half)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0 122,500 11,070 5 1 0 86,947 11,070
10 1 0 129,660 18,307 10 1 0 91,913 18,307
15 1 0 144,310 24,996 15 1 0 103,550 24,996
20 1 0 144,370 31,410 20 1 0 104,120 31,410
Ljung-Box-Pierce Q-test (CROBEX index - second half) Ljung-Box-Pierce Q-test (VIN index - whole period)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 0 0,55914 3,933 11,070 5 1 0 140,200 11,070
10 0 0,68312 7,442 18,307 10 1 0 140,860 18,307
15 0 0,88390 8,876 24,996 15 1 0 150,860 24,996
20 0 0,97845 9,353 31,410 20 1 0 156,510 31,410
ARCH test (CROBEX index - second half) ARCH test (VIN index - whole period)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 0 0,62209 3,509 11,070 5 1 0 147,560 11,070
10 0 0,77846 6,424 18,307 10 1 0 148,560 18,307
15 0 0,93332 7,752 24,996 15 1 0 157,560 24,996
20 0 0,98110 9,150 31,410 20 1 0 159,130 31,410
Ljung-Box-Pierce Q-test (VIN index - first half) Ljung-Box-Pierce Q-test (VIN index - second half)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0 74,249 11,070 5 1 0 104,120 11,070
10 1 0 74,516 18,307 10 1 0 118,710 18,307
15 1 0 78,853 24,996 15 1 0 140,520 24,996
20 1 0 80,807 31,410 20 1 0 163,490 31,410
ARCH test (VIN index - first half) ARCH test (VIN index - second half)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0 81,225 11,070 5 1 0 72,142 11,070
10 1 0 81,460 18,307 10 1 0 75,961 18,307
15 1 0 85,560 24,996 15 1 0 94,324 24,996
20 1 0 85,970 31,410 20 1 0 99,334 31,410

Table 4 - Test of independency for CROBEX and VIN index tail events in the period 04.01.2000 - 04.01.2006.

CROBEX index
Ljung-Box-Pierce Q-test (Tail events for HS 50 95%) Ljung-Box-Pierce Q-test (Tail events for HS 250 95%)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 0 0,35268 5,548 11,070 5 1 0,01962 13,435 11,070
10 0 0,39100 10,582 18,307 10 0 0,10062 15,965 18,307
15 0 0,20365 19,227 24,996 15 0 0,11886 21,595 24,996
20 0 0,43852 20,313 31,410 20 0 0,32669 22,258 31,410
Ljung-Box-Pierce Q-test (Tail events for HS 100 95%) Ljung-Box-Pierce Q-test (Tail events for HS 400 95%)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0,03837 11,751 11,070 5 1 0,01108 14,837 11,070
10 0 0,09236 16,263 18,307 10 0 0,05531 17,979 18,307
15 1 0,04948 25,035 24,996 15 0 0,05376 24,725 24,996
20 0 0,14492 26,666 31,410 20 0 0,18561 25,426 31,410
Ljung-Box-Pierce Q-test (Tail events for BRW λ=0,97 95%)
Period Critical
H p-value Statistic
(days) value
5 0 0,68598 3,091 11,070
10 0 0,91650 4,596 18,307
15 0 0,93993 7,568 24,996
20 0 0,98885 8,402 31,410
Ljung-Box-Pierce Q-test (Tail events for BRW λ=0,99 95%)
Period Critical
H p-value Statistic
(days) value
5 1 0,04230 11,501 11,070
10 0 0,16225 14,242 18,307
15 0 0,17775 19,850 24,996
20 0 0,42272 20,572 31,410

VIN index
Ljung-Box-Pierce Q-test (Tail events for HS 50 95%) Ljung-Box-Pierce Q-test (Tail events for HS 250 95%)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 1,14E-05 30,571 11,070 5 1 0,00142 19,710 11,070
10 1 0,00024 33,354 18,307 10 1 0,02010 21,146 18,307
15 1 1,41E-05 49,582 24,996 15 1 0,00203 35,589 24,996
20 1 6,33E-07 66,661 31,410 20 1 1,50E-05 57,905 31,410
Ljung-Box-Pierce Q-test (Tail events for HS 100 95%) Ljung-Box-Pierce Q-test (Tail events for HS 400 95%)
Period Critical Period Critical
H p-value Statistic H p-value Statistic
(days) value (days) value
5 1 0,01018 15,0430 11,070 5 1 2,12E-06 34,254 11,070
10 0 0,08009 16,7500 18,307 10 1 0,00012 35,074 18,307
15 1 0,00346 33,9510 24,996 15 1 1,77E-05 48,978 24,996
20 1 1,26E-06 64,7860 31,410 20 1 4,60E-08 73,633 31,410

Ljung-Box-Pierce Q-test (Tail events for BRW λ=0,97 95%)

Period Critical
H p-value Statistic
(days) value
5 0 0,16974 77,639 11,070
10 0 0,46721 96,999 18,307
15 1 0,019947 28,269 24,996
20 1 0,0009445 45,497 31,410
Ljung-Box-Pierce Q-test (Tail events for BRW λ=0,99 95%)
Period Critical
H p-value Statistic
(days) value
5 1 0,009488 15,214 11,070
10 0 0,080374 16,738 18,307
15 1 0,0046158 33,053 24,996
20 1 1,45E-05 57,984 31,410

Table 5 – Backtesting results for 1.000 historical simulation and BRW VaR forecasts for CROBEX and VIN
index

CROBEX index
HS 50 HS 50 HS 50 HS 100 HS 100 HS 100 HS 250 HS 250 HS 250
Model (95%) (97,5%) (99%) (95%) (97,5%) (99%) (95%) (97,5%) (99%)
Number of failures 65 41 22 53 35 22 46 26 14
Probability value 0,01493 0,00101 0,00027 0,30017 0,02104 0,00027 0,68847 0,36964 0,08241
Frequency of failures 0,065 0,041 0,022 0,053 0,035 0,022 0,046 0,026 0,014
0,05052 0,02958 0,01384 0,03995 0,0245 0,01384 0,03387 0,01705 0,00767
Confidence interval
0,0821 0,05521 0,03312 0,06876 0,04834 0,03312 0,06088 0,03787 0,02338
Accept model NO NO NO YES NO NO YES YES NO
 BRW BRW BRW BRW BRW BRW
HS 400 HS 400 HS 400
Model (95%)
λ=0,97
(97,5%) (99%)
λ=0,97 λ=0,97 λ=0,99 λ=0,99 λ=0,99
(95%) (97,5%) (99%) (95%) (97,5%) (99%)
Number of failures 44 24 14 53 27 14 45 27 11
Probability value 0,78532 0,52761 0,08241 0,30017 0,29801 0,08241 0,73904 0,29801 0,30265
Frequency of failures 0,044 0,024 0,014 0,053 0,027 0,014 0,045 0,027 0,011
0,03215 0,01544 0,00767 0,03995 0,01787 0,00767 0,03301 0,01787 0,0055
Confidence interval
0,05862 0,0355 0,02338 0,06876 0,03904 0,02338 0,05975 0,03904 0,0196
Accept model YES YES NO YES YES NO YES YES YES

VIN index
HS 50 HS 50 HS 50 HS 100 HS 100 HS 100 HS 250 HS 250 HS 250
Model (95%) (97,5%) (99%) (95%) (97,5%) (99%) (95%) (97,5%) (99%)
Number of failures 58 38 26 50 31 14 50 30 14
Probability value 0,11056 0,00514 5,57E-06 0,46247 0,09729 0,08241 0,46247 0,13381 0,08241
Frequency of failures 0,058 0,038 0,026 0,05 0,031 0,014 0,05 0,03 0,014
0,04433 0,02703 0,017053 0,03734 0,02116 0,00767 0,03734 0,02033 0,00767
Confidence interval
0,07434 0,05179 0,037865 0,06539 0,04372 0,02338 0,06539 0,04255 0,02338
Accept model YES NO NO YES NO NO YES YES NO
BRW BRW BRW BRW BRW BRW
HS 400 HS 400 HS 400
Model (95%) (97,5%) (99%)
λ=0,97 λ=0,97 λ=0,97 λ=0,99 λ=0,99 λ=0,99
(95%) (97,5%) (99%) (95%) (97,5%) (99%)
Number of failures 49 25 11 46 29 16 43 23 9
Probability value 0,52026 0,44707 0,30265 0,68847 0,17933 0,02639 0,82671 0,60806 0,5427
Frequency of failures 0,049 0,025 0,011 0,046 0,029 0,016 0,043 0,023 0,009
0,03647 0,01624 0,0055 0,03387 0,01951 0,00917 0,03129 0,01464 0,00412
Confidence interval
0,06427 0,03669 0,0196 0,06088 0,04139 0,02585 0,05749 0,03431 0,01702
Accept model YES YES YES YES YES NO YES YES YES

Figure 1 – Daily values of CROBEX index in the period 04.01.2000 - 04.01.2006. (1469 observations)
2 2 0 0

2 0 0 0

1 8 0 0

1 6 0 0

1 4 0 0

1 2 0 0

1 0 0 0

8 0 0

6 0 0
J a n 2 0 0 0 J a n 2 0 0 1 J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 2 – Daily returns on CROBEX index in the period 04.01.2000 - 04.01.2006. (1468 observations)
0 . 1 5

0 . 1

0 . 0 5
Return

- 0 . 0 5

- 0 . 1
J a n 2 0 0 0 J a n 2 0 0 1 J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6
 Figure 3 – Daily values of VIN index in the period 04.01.2000 - 04.01.2006. (1483 observations)
2 2 0 0

2 0 0 0

1 8 0 0

1 6 0 0

1 4 0 0

1 2 0 0

1 0 0 0

8 0 0

6 0 0

4 0 0

2 0 0
J a n 2 0 0 0 J a n 2 0 0 1 J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 4 – Daily returns on VIN index in the period 04.01.2000 - 04.01.2006. (1482 observations)
0 . 1 5

0 . 1

0 . 0 5

0
Return

- 0 . 0 5

- 0 . 1

- 0 . 1 5

- 0 . 2
J a n 2 0 0 0 J a n 2 0 0 1 J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 5 - Probability plot for CROBEX and VIN index, period 04.01.2000 - 04.01.2006

0.99 0.99
0.95
0.9 0.95
Probability

0. 9
Probability

0.75 0.75
0.5 0. 5
0.25 0.25
0.1
0.05
0. 1
0.05
0.01 0.01

-0.05 0 0.05 0.1 -0.15 -0.1 -0. 05 0 0.05 0.1

Return Return
CROBEX index VIN index

Figure 6 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with 50
days observation window for CROBEX index
0 . 1 5
C R O B E X
H S 5 0 9 5 %
0 . 1 H S 5 0 9 7 , 5 %
H S 5 0 9 9 %

0 . 0 5
Return

-0 . 0 5

-0 . 1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6
Figure 7 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with 100
days observation window for CROBEX index
0 . 1 5
C R O B E X
H S 1 0 0 9 5 %
0 . 1 H S 1 0 0 9 7 , 5 %
H S 1 0 0 9 9 %

0 . 0 5
Return

-0 . 0 5

-0 . 1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 8 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with 250
days observation window for CROBEX index
0 .1 5
C R O B E X
H S 2 5 0 9 5 %
0 .1 H S 2 5 0 9 7 ,5 %
H S 2 5 0 9 9 %

0 .0 5
Return

-0 .0 5

-0 .1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 9 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with 400
days observation window for CROBEX index
0 . 1 5
C R O B E X
H S 4 0 0 9 5 %
0 . 1 H S 4 0 0 9 7 , 5 %
H S 4 0 0 9 9 %

0 . 0 5
Return

-0 . 0 5

-0 . 1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6
Figure 10 – BRW VaR (λ=0,97) for 1.000 observations at confidence level of 1, 2.5 and 5 percent for CROBEX
index
0 . 1 5
C R O B E X
B R W H S 9 5 %
0 . 1 B R W H S 9 7 , 5 %
B R W H S 9 9 %

0 . 0 5
Return

-0 . 0 5

-0 . 1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6
Figure 11 – BRW VaR (λ=0,99) for 1.000 observations at confidence level of 1, 2.5 and 5 percent for CROBEX
index
0 . 1 5
C R O B E X
B R W H S 9 5 %
0 . 1 B R W H S 9 7 , 5 %
B R W H S 9 9 %

0 . 0 5
Return

-0 . 0 5

-0 . 1
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 12 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with 50
days observation window for VIN index
0 . 0 6

0 . 0 4

0 . 0 2

0
Return

- 0 . 0 2

- 0 . 0 4
V IN
H S 5 0 9 5 %
- 0 . 0 6
H S 5 0 9 7 , 5 %
H S 5 0 9 9 %
- 0 . 0 8
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 13 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with
100 days observation window for VIN index
0 . 0 6

0 . 0 4

0 . 0 2

0
Return

- 0 . 0 2

- 0 . 0 4
V IN
H S 1 0 0 9 5 %
- 0 . 0 6
H S 1 0 0 9 7 , 5 %
H S 1 0 0 9 9 %
- 0 . 0 8
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 14 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with
250 days observation window for VIN index
0 . 0 6

0 . 0 4

0 . 0 2

0
Return

-0 . 0 2

-0 . 0 4
V IN
H S 2 5 0 9 5 %
-0 . 0 6
H S 2 5 0 9 7 , 5 %
H S 2 5 0 9 9 %
-0 . 0 8
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6
Figure 15 – Historical simulation VaR for 1.000 observations at confidence level of 1, 2.5 and 5 percent with
400 days observation window for VIN index
0 .0 6

0 .0 4

0 .0 2

0
Return

-0 .0 2

-0 .0 4
V IN
H S 4 0 0 9 5 %
-0 .0 6
H S 4 0 0 9 7 ,5 %
H S 4 0 0 9 9 %
-0 .0 8
J a n 2 0 0 2 J a n 2 0 0 3 J a n 2 0 0 4 J a n 2 0 0 5 J a n 2 0 0 6

Figure 16 – BRW VaR (λ=0,97) for 1.000 observations at confidence level of 1, 2.5 and 5 percent for VIN index
0 .0 6

0 .0 4

0 .0 2

0
Return

-0 .0 2

-0 .0 4
V IN
B R W H S 9 5 %
-0 .0 6
B R W H S 9 7 ,5 %
B R W H S 9 9 %
-0 .0 8
Ja n 2 0 0 2 Ja n 2 0 0 3 Ja n 2 0 0 4 Ja n 2 0 0 5 Ja n 2 0 0 6

Figure 17 – BRW VaR (λ=0,99) for 1.000 observations at confidence level of 1, 2.5 and 5 percent for VIN index
0 .0 6

0 .0 4

0 .0 2

0
Return

-0 .0 2

-0 .0 4
V IN
B R W H S 9 5 %
-0 .0 6
B R W H S 9 7 ,5 %
B R W H S 9 9 %
-0 .0 8
Ja n 2 0 0 2 Ja n 2 0 0 3 Ja n 2 0 0 4 Ja n 2 0 0 5 Ja n 2 0 0 6