Financial Risk Measurement for Turkish Insurance Companies Using VaR Models
Author(s)
Ismail Yildirim
ABSTRACT
This study aims to measure the foreign exchange risks that the insurance companies are exposed to. In this context, this study analyzes 7 insurance companies listed in Borsa Istanbul (Istanbul Stock Exchange). The foreign exchange risks that the insurance companies are exposed to were measured using VaR models, Historical Simulation and Monte Carlo Simulation methods. Data obtained from the analysis show the losses that the insurance companies suffer due to exchange risk. The losses calculated using the Monte Carlo Simulation were found to be greater than the losses calculated using Historical Simulation.
This study aims to measure the foreign exchange risks that the insurance companies are exposed to. In this context, this study analyzes 7 insurance companies listed in Borsa Istanbul (Istanbul Stock Exchange). The foreign exchange risks that the insurance companies are exposed to were measured using VaR models, Historical Simulation and Monte Carlo Simulation methods. Data obtained from the analysis show the losses that the insurance companies suffer due to exchange risk. The losses calculated using the Monte Carlo Simulation were found to be greater than the losses calculated using Historical Simulation.
Cite this paper
Yildirim, I. (2015) Financial Risk Measurement for Turkish Insurance Companies Using VaR Models. Journal of Financial Risk Management, 4, 158-167. doi: 10.4236/jfrm.2015.43013.
Yildirim, I. (2015) Financial Risk Measurement for Turkish Insurance Companies Using VaR Models. Journal of Financial Risk Management, 4, 158-167. doi: 10.4236/jfrm.2015.43013.
References
[1] Adams, Z., Füss, R., & Gropp, R. (2014). Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach. Journal of Financial and Quantitative Analysis, 49, 575-598.
http://dx.doi.org/10.1017/S0022109014000325 [2] Assaf, A. (2015). Value-at-Risk Analysis in the MENA Equity Markets: Fat Tails and Conditional Asymmetries in Return Distributions. Journal of Multinational Financial Management, 29, 30-45.
http://dx.doi.org/10.1016/j.mulfin.2014.11.002 [3] Baciu, O.A. (2014). Value-at-Risk Estimation on Bucharest Stock Exchange. Journal of Applied Quantitative Methods, 9, No. 4. [4] Basel Committee on Banking Supervision (2009). Revisions to the Basel II Market Risk Framework.
http://www.bis.org/publ/bcbs158.htm [5] BIS (2005). Stress Testing at Major Financial Institutions: Survey Results and Practice. Working Group Report, Committee on the Global Financial System, Bank for International Settlements, BASEL, Switzerland. [6] Bolgün, K. E., & Akçay, B. (2009). Risk Yönetimi. Istanbul: Scala Yayincilik. [7] Giddy, I., & Dufey, G. (2006). The Management of Foreign Exchange Risk. New York: New York University, Stern School of Business.
http://pages.stern.nyu.edu/~igiddy/fxrisk.htm [8] Glasserman, P. (2004). Monte Carlo Methods in Financial Engineering. New York: Springer. [9] Guo, L. (2008). Effective Stress Testing in Enterprise Risk Management.
http://file:///C:/Users/Fujitsu/Downloads/mono-2008-m-as08-1-guo%20(1).pdf [10] Iglesias, E. M. (2015). Value at Risk and Expected Shortfall of Firms in the Main European Union Stock Market Indexes: A Detailed Analysis by Economic Sectors and Geographical Situation. Economic Modelling, 50, 1-8.
http://dx.doi.org/10.1016/j.econmod.2015.06.004 [11] Insurance Europe (2013). Currency Risk, Briefing Note.
http://financial-stability.org/research/artikel/2013/2013-q1/2013-q1-detail/date/2013/march/article/solvency-ii-currency-risk-module-flawed/ [12] Iorgulescua, F. (2012). Backtesting Value-at-Risk: Case Study on the Romanian Capital Market. Procedia—Social and Behavioral Sciences, 62, 796-800. www.sciencedirect.com [13] Janssen, M. J. J. (2009). Portfolio Optimization with a Value at Risk Constraint in the Presence of Unhedgeable Risks. Amsterdam: Department of Quantitative Economics, University of Amsterdam. [14] Jorion, P. (2000). Value at Risk: The New Benchmark for Controlling Risk (2nd ed.). New York: McGraw-Hill Inc. [15] Keçeci, F. N., & Sarul, L. S. (2014). Application of Value at Risk (VaR) Models on Insurance Claim Data. Digital Proceeding of the ISDS’2014, Side, 10-14 May 2014. [16] Majumdar, C. (2008). VaR (Value at Risk) for Insurance Risk—A Simple Model. 10th Global Conference of Actuaries, 7-8 February 2008. [17] Manganelli, S., & Engle, R. F. (2001). Value at Risk Model in Finance. European Central Bank Working Paper Series, 75, 1-40. [18] Pallotta, M., & Zenti, R. (2000). Risk Analysis for Asset Managers: Historical Simulation, the Bootstrap Approach and Value at Risk Calculation. RAS Asset Management.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251669 [19] Piroozfar, G. (2009). Forecasting Value at Risk with Historical and Filtered Historical Simulation Methods. U.U.D.M. Project Report, Uppsala: Department of Mathematics, Uppsala University. [20] Popov, V., & Stutzmann, Y. (2003). How Is Foreign Exchange Managed: An Empirical Study Applied to Two Swiss Companies. Master’s Thesis, Lausanne: University of Lausanne. [21] Su, B. J. (2015). Value-at-Risk Estimates of the Stock Indices in Developed and Emerging Markets Including the Spillover Effects of Currency Market. Economic Modeling, 46, 204-224. [22] Yildirim, I. (2012). Stress Testing in Risk Management: An Application in the Turkish Banking Sector. International Journal of Trade, Economics and Finance, 3, 441-444.
[1] Adams, Z., Füss, R., & Gropp, R. (2014). Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach. Journal of Financial and Quantitative Analysis, 49, 575-598.
http://dx.doi.org/10.1017/S0022109014000325 [2] Assaf, A. (2015). Value-at-Risk Analysis in the MENA Equity Markets: Fat Tails and Conditional Asymmetries in Return Distributions. Journal of Multinational Financial Management, 29, 30-45.
http://dx.doi.org/10.1016/j.mulfin.2014.11.002 [3] Baciu, O.A. (2014). Value-at-Risk Estimation on Bucharest Stock Exchange. Journal of Applied Quantitative Methods, 9, No. 4. [4] Basel Committee on Banking Supervision (2009). Revisions to the Basel II Market Risk Framework.
http://www.bis.org/publ/bcbs158.htm [5] BIS (2005). Stress Testing at Major Financial Institutions: Survey Results and Practice. Working Group Report, Committee on the Global Financial System, Bank for International Settlements, BASEL, Switzerland. [6] Bolgün, K. E., & Akçay, B. (2009). Risk Yönetimi. Istanbul: Scala Yayincilik. [7] Giddy, I., & Dufey, G. (2006). The Management of Foreign Exchange Risk. New York: New York University, Stern School of Business.
http://pages.stern.nyu.edu/~igiddy/fxrisk.htm [8] Glasserman, P. (2004). Monte Carlo Methods in Financial Engineering. New York: Springer. [9] Guo, L. (2008). Effective Stress Testing in Enterprise Risk Management.
http://file:///C:/Users/Fujitsu/Downloads/mono-2008-m-as08-1-guo%20(1).pdf [10] Iglesias, E. M. (2015). Value at Risk and Expected Shortfall of Firms in the Main European Union Stock Market Indexes: A Detailed Analysis by Economic Sectors and Geographical Situation. Economic Modelling, 50, 1-8.
http://dx.doi.org/10.1016/j.econmod.2015.06.004 [11] Insurance Europe (2013). Currency Risk, Briefing Note.
http://financial-stability.org/research/artikel/2013/2013-q1/2013-q1-detail/date/2013/march/article/solvency-ii-currency-risk-module-flawed/ [12] Iorgulescua, F. (2012). Backtesting Value-at-Risk: Case Study on the Romanian Capital Market. Procedia—Social and Behavioral Sciences, 62, 796-800. www.sciencedirect.com [13] Janssen, M. J. J. (2009). Portfolio Optimization with a Value at Risk Constraint in the Presence of Unhedgeable Risks. Amsterdam: Department of Quantitative Economics, University of Amsterdam. [14] Jorion, P. (2000). Value at Risk: The New Benchmark for Controlling Risk (2nd ed.). New York: McGraw-Hill Inc. [15] Keçeci, F. N., & Sarul, L. S. (2014). Application of Value at Risk (VaR) Models on Insurance Claim Data. Digital Proceeding of the ISDS’2014, Side, 10-14 May 2014. [16] Majumdar, C. (2008). VaR (Value at Risk) for Insurance Risk—A Simple Model. 10th Global Conference of Actuaries, 7-8 February 2008. [17] Manganelli, S., & Engle, R. F. (2001). Value at Risk Model in Finance. European Central Bank Working Paper Series, 75, 1-40. [18] Pallotta, M., & Zenti, R. (2000). Risk Analysis for Asset Managers: Historical Simulation, the Bootstrap Approach and Value at Risk Calculation. RAS Asset Management.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251669 [19] Piroozfar, G. (2009). Forecasting Value at Risk with Historical and Filtered Historical Simulation Methods. U.U.D.M. Project Report, Uppsala: Department of Mathematics, Uppsala University. [20] Popov, V., & Stutzmann, Y. (2003). How Is Foreign Exchange Managed: An Empirical Study Applied to Two Swiss Companies. Master’s Thesis, Lausanne: University of Lausanne. [21] Su, B. J. (2015). Value-at-Risk Estimates of the Stock Indices in Developed and Emerging Markets Including the Spillover Effects of Currency Market. Economic Modeling, 46, 204-224. [22] Yildirim, I. (2012). Stress Testing in Risk Management: An Application in the Turkish Banking Sector. International Journal of Trade, Economics and Finance, 3, 441-444.