form of the return distribution and is quite robust over distributional forms. Besides, thesetechniques are easy to understand and implement. But this approach suffers from the lack of analytical flexibility and several other disadvantages of what non-parametric approaches share. Alternatively, one can simply fit the parametric form of a suitable non-normal distribution to theobserved returns. The class of distributional forms considered would be quite wide including, say, t-distribution, mixture of two normal distribution, hyperbolic distribution, Laplace distribution or soforth, ( van den Goorbergh and Vlaar, 1999; Bauer 2000; Linden, 2001 ). The non-normality,particularly the excess-kurtosis problem can also be captured through a class of conditionalheteroscedasticity models The third category, which is also parametric, takes help of extreme valuetheory and models either the distribution of maximum/minimum return or only the tails of returndistribution. The parametric approaches are extremely useful for analytical purpose but identificationof actual/appropriate parametric form is extremely difficult. Another sensible strategy to deal with non-normality while estimating VaR, as proposedrecently by Samanta (2003),would involves transforming the (non-normal) return to a (near) normal variable (hence forth we call this as “transformation-based strategy”). Once portfolio returns aretransformed into normal variates, one would first derive the suitable percentile for the transformedreturn distribution, which by construction follows a normal distribution. Applying the properties of the normal distribution, this task is easy. Finally this percentile (for transformed series) can beinverted (by applying the inverse transformation) to derive the percentile of the original return.Samanta (2003)shows that the empirical application of the new strategy to returns from selectedstock price index in USA and India provides quite encouraging results. In this study we made anattempt to examine the suitability of the transformation-based approach of VaR for Stock andforeign exchange (FOREX) markets in an emerging market, viz., India. The organisation of the restof the study is as follows. In Section 2, a brief description of VaR as well as techniques for evaluating accuracy of VaR estimates is given. Section 3 deals with the new transformation-based strategy.Section 4 presents the empirical results. Finally, Section 5 concludes.
The VaR is a numerical measure of the amount by which a financial position in a risk category couldincur loses due to, say, market swings (market risk) during a given holding period. As mentionedearlier, the measure is defined under a probabilistic framework. If W
denotes the value of thefinancial assets in the financial position at time instance t, the change in value of the position fromtime t to t+k would be
(k) = (W
). At time point t,
(k) is unknown and can bethought of a random variable. Let, f(
) denotes the probability density function of