A COMPARATIVE STUDY OF MARKET RISK MEASUREMENT MODELS FOR THE CHINESE STOCK MARKET
DOI:
https://doi.org/10.18623/rvd.v23.n3.4368Keywords:
Stock Market Risk, Var Model, Cvar Model, Risk Measurement, Market Volatility, Liquidity RiskAbstract
The purpose of this study is to compare two major risk measurement models in financial markets—the Value at Risk (VaR) model and the Conditional Value at Risk (CVaR) model—and to evaluate their effectiveness and limitations in stock market risk management. First, through an in-depth analysis of the theoretical foundations of stock market risk, the paper clarifies the importance of risk for investment decision-making, in particular its impact on asset allocation and risk management strategies. The findings show that VaR, as a traditional risk measurement tool, is simple and convenient and enables a rapid assessment of market risk; however, when confronted with extreme tail events it exhibits certain shortcomings and cannot fully capture the true risk of extreme losses. By contrast, CVaR, by focusing on tail risk, makes it possible to identify potential extreme losses more accurately; especially during periods of sharp market volatility, its early-warning function substantially outperforms VaR. In the empirical part of the article, historical data for the Shanghai A-share index are used. The GARCH-M model is applied to estimate VaR and CVaR, and their values are compared when measuring stock market risk. The results indicate that, at the same confidence level, CVaR is always greater than VaR, which further confirms the advantage of CVaR in reflecting risk losses more accurately, especially tail risk. Overall, this study not only provides a theoretical basis for risk management in financial markets, but also offers recommendations for improving risk measurement methods in the stock market, emphasizing the need to account for tail risk when making investment decisions. The conclusions have important reference value for investors seeking to develop more scientifically grounded risk control strategies in a dynamic market environment.
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