A VaR-based Downside Risk Analysis of Indian Equity Mutual Funds in the Pre- and Post-global Financial Crisis Periods

Abstract

This article analyses downside risk of Indian equity mutual funds from 1999 to 2014 using a value at risk (VaR)-based approach. We use weekly return data of a sample of 349 equity mutual funds during the said period to estimate their weekly VaRs on a rolling basis using some parametric and non-parametric models. Moving average (MA), exponentially weighted MA and GARCH (1, 1) are the parametric models and historical simulation (HS) is the non-parametric model. We also carry out backtesting of the models using three popular approaches—two under the unconditional coverage approach, namely Jorion’s ‘Failure Rate’ approach and Kupiec’s proportion of ‘failures’ (POF) test, and one under the conditional coverage approach, namely the Christoffersen’s Independence test—to test the robustness of the VaR models. Our results show that Indian equity mutual funds exhibit considerable downside risk during the chosen period, in terms of the magnitude of the projected VaRs. Moreover, significant proportions of the funds ‘fail’ the predicted VaRs, particularly during times of crisis for some of the models, raising questions about their robustness in an investment setting in India. On the whole, both from failure proportion as well as backtesting perspective, the GARCH (1,1) seems to be the most robust of the models.

JEL codes: G32, G15, G23