Application of Multi Factor Risk Model for Estimating Value-At-Riskin Indian Stock Market

Abstract

In this paper Value at Risk has been estimated for stock returns derived from simulated risk factors. Borrowing from Fama French's factor model,it has been exploredthat stock returns are function of more than one risk factor in emerging markets. Risk factors are simulated using Monte Carlo simulation according to the distributions best fitting the historic data. Relationship between stock returns and risk factors is analysed using OLS regression to derive future stock returns. Value-at-Risk is estimated at 95% and 90% confidence level from derived returns from simulated risk factors.Backtesting results showed positive results when performed for multifactor risk model on monthly share prices.